Treasury bills

Interest rate provided by U.S. Treasury bills, notes, and bonds at different dates. 

Cash Reserves. This includes funds that are readily available in checking accounts, money market accounts, certificates of deposit of one year or less, U.S. Government Series EE and HH bonds, and U.S. Treasury bills. 

For risk-free investments, such as U.S. Treasury bills, the required return (as a percent of the capital invested) is determined by supply and demand in the money markets. If the going risk-free interest rate is 5 percent per year, for example, an investor who puts up 100 expects to get at least 105 back next year. From another point of view, 100 promised for delivery next year is worth only 95.23 today, because the investor could take that 95.23, invest it in a risk-free security, and have the 100 a year hence. Not having access to the 95.23 today essentially deprives the investor of the opportunity to invest at the going interest rate. 

This principle lies behind the payment of interest on safe investments like insured bank deposits or U.S. Treasury bills. 

Risk is the third component of the R D investment. Riskier investments require higher dollar returns otherwise investors would put their money in safe investments like U.S. Treasury bills. Thus, the opportunity cost of capital for R D investments must be higher than the cost of capital for risk-free investments. And, the present value of 100 that is expected next year but with a great deal of uncertainty is even lower than the present value of a risk-free investment. How much higher the opportunity cost of capital for an R D investment is, and how much lower the present value of future expected returns is, depends on the riskiness of the R D investment. 

Investors in pharmaceutical research and development (R D) put up their money because they expect, on average, to get returns that adequately compensate them for the time and risk involved. Just as the interest rate on bank deposits is a payment for the use of depositors money (or capital), the return on an investment in R D is a payment the company or its investors get from the use of their capital. Riskier investments require higher dollar returns otherwise, investors would put their money in safe investments like U.S. Treasury bills or bank certificates of deposit. The riskier the investment, the higher the required return. The rate of return that investors must be able to expect from money invested with a given level of risk is referred to as the investment s cost of capital. ... 

How does one measure the riskiness of an investment This is the key question in estimating the cost of capital for any project. Were there no risk the cost of capital would be the same as the interest rate on U. S. Treasury bills. 

OTA had two sources of evidence on pharmaceutical betas. First, as described earlier, Myers and Shyam-Sunder estimated market value-weighted equity betas for a sample of 17 large U.S. pharmaceutical firms by regressing excess returns (over the Treasury bill rate) against excess returns on Standard and Poor s 500 composite index for 60-month periods ending in December 1979 December 1984 and December 1989. Estimated betas were 0.97, 0.66, and 0.98 respectively (285). 

Myers and Shyam-Sunder observed that the appropriate risk-free rate is the short-term Treasury bill rate, but this must be adjusted for forecasts that will govern... 

The realized market risk premium (over the risk-free rate) is highly volatile over time, while expected risks are assumed to be stable over long periods. Therefore, the market risk premium is typically estimated over a long period of time (198). Myers and Shyam-Sunder found an arithmetic mean of 8.7 percent for excess market return over the Treasury bill rate for the period 1926-89 (285). The market risk premium declined in the post-war period, however, and the premium for the period 1947-88 was 8.3 percent (285). 

In an unrelated study, Stewart estimated the market risk premium by comparing Standard and Poor s 500 stocks with long-term (20-year) U.S. Treasury bonds from 1925 to 1989 (409). He found that the risk premium was only 5.8 percent over the period. This would imply a risk premium over the Treasury bill rate (adjusted for long-term forecasts) of just 7.0 percent. 

The value of the risk-free rate of return, r, can be estimated as being equal to the interest rate paid on U.S. Treasury Bills or other guaranteed savings instruments, approximately 6% in mid-20(X). The interest rate equivalent to the general equity market, was found to be approximately 9% by Fisher and Lorie (1968). Over the past 30 years this figure has risen to 11%. The effective tax rate, t, can... 

Efficient frontiers also invariably place Treasury bills as the risk-free asset. T-bills may be risk-free from a creditworthiness point of view, bnt it is not tenable that a three-month nominal asset is a risk-free instrn-ment for someone with, say, a 30-year savings horizon. If you are investing for 30 years, over which time you are interested in your prospective real returns, then a 30-year linker (to be held to maturity) is your riskfree asset, almost by definition. 100% invested in that bond becomes the lowest risk portfolio on yonr frontier. Efficient frontier analysis starts to lose its impact once this premise is accepted, not least because you do not have a large data sample of consecutive, nonoverlapping 30-year periods (for any asset) to produce robust analysis. ... 

That is, a money market product quoted as a yield instrument, similar to a bank deposit or a certificate of deposit. The other class of money market products are discount instruments such as a Treasury bill or commercial paper. 

Negotiable debt instruments traded on a French or foreign regulated market, including government paper such as BTANs, OATs, and Treasury bills, as well as CDs and certain other securities. 

We will use the Vasicek model for pricing a 3-year European call option on a 10-year zero-coupon bond with face value 1 and exercise price K equal to 0.5. As in Jackson and Staunton, we use for the parameters of this model the values estimated by Chan, Karolyi, Longstaff, and Sanders for US 1-month Treasury bill yield from 1964 to 1989. Thus a = 0.0154, p = 0.1779, and o = 2%. In addition, the value of the short... 

Ideally, an instrument s yield indicates what return an investor can achieve by holding it. Such an ideal measure would be a function of the value of the initial investment, the holding period, and the value of the matured investment. It would also take into account any reinvestment of the income received during the holding period—that is, the effect of compounding. A yield measure having these properties may be defined as follows for a simple instrument such as a Treasury bill. 

Examfi.e An investor has just purchased a 6-month (180-day) Treasury bill. The face value of this security is 10,000, and the discount rate is 9.75 percent. What is the dollar value of the discount for this security ... 

Example What is the annual discount rate for a 180-day Treasury bill with a face value of 10,000 and a current price of 9,512.50 ... 

Example If an investor purchases a 90-day Treasury bill for 9,500 and sells it in 45 days for 9,750, what is the simple interest rate, or the rate of return, that the investor earns on this investment ... 

For the 120-day Treasury bill, the simple interest rate of 10.49 percent assumes that the investor could earn... 

Because of compounding, the investor is better off, in terms of effective return, if it is able to invest in 4 consecutive 30-day Treasury bills, each with a discount rate of 10.25 percent. 

Example What is the equivalent bond yield for a 95-day Treasury bill with a quoted discount rate of 11.5 percent ... 

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