CM1 Practice Question

A 206-day government bill, redeemable at £100, was purchased for £95 at the

time of issue and was later sold to another investor for £96.85. The rate of

return received by the initial purchaser was 4% per annum effective.

(a) Calculate the length of time in days for which the initial purchaser held

the bill.

(b) Calculate the annual simple rate of return achieved by the second

investor.

Solution:

(a) Length of time for which the initial purchaser held the bill

If the first investor sells the bill at time t years, his equation of value is:

(b) Annual simple rate of return achieved by the second investor

Let i be the annual simple rate of return earned by the second investor: