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The treasurer of a large corporation wants to invest $24 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.87 percent; that is, the EAR for this investment is 3.87 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 98 days, what is the percentage discount yields on this investment

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Answer: 3.73%

Explanation:

We are given an EAR so first we'd have to convert it to an APR.

We do so by the following formula,

APR = [(Ear + 1)^(1/n) - 1 ] x n

APR = ((3.87% + 1) ^ (1/365/98) - 1) x 365/98

APR = ((1.0387) ^ (98/365) - 1) x 365/98

APR = 3.816%

Now that we have the APR, we get the percentage discount yields by,

= ( [360(.03816)] / [365 + (98)(.03816))

= 3.73%

The percentage discount yields on this investment is 3.73%