Business Mathematics Brief 12th Edition by Stanley Salzman ,Gary Clendenen, Charles Miller

Exercise 114

16. First, find the initial proceeds of the following simple discount notes. The note is then discounted at 11 ,. Find the discount period, the discount, and the proceeds after discounting. (See Example.)
Finding the Proceeds
Benson Automotive used excess cash to purchase a $100,000 Treasury bill with a term of 26 weeks at a 3.5% simple discount rate. However, the firm needs cash exactly 8 weeks later and sells the T-bill. During the 8 weeks, market interest rates changed slightly so that the bill was sold at a 3% discount rate. Find (a) the initial purchase price of the T-bill, (b) the proceeds received by the firm at the subsequent sale of the T-bill, and (c) the effective interest rate.
SOLUTION

The company would have earned 3.5% on the T-bill had it left the Treasury bill invested until maturity. Instead, the company sold it after market interest rates rose, but before the T-bill matured. This caused the company to end up with an effective interest rate somewhat higher than the 3.5%.