Enclosed is the case study question
You can use a variety of online sites to find listings of Treasury instruments, i.e., Federal money market bills, U.S. Savings Bonds, CDs, U.S. Treasury Notes, Treasury Bills, and TIPS, as noted in the assignment. You need to list the CUSIP (Committee on Uniform Security Identification Procedures) of each instrument you select. CUSIP is the nine-digit alphanumeric code that identifies a U.S. security individually to facilitate trading. One such site is TreasuryDirect (https://www.treasurydirect.gov/instit/auctfund/work/auctime/auctime_securitiestable.htm), but the same info is available through a variety of sites. You may use more than one, but be sure to identify the ones you use for individual instruments. Also, please use the same date for your quotes
You’ll find the current rates and asking prices of these instruments in the listings.
You also need to compute the EAR (Effective Annual Rate) for each instrument. The formula is:
R = [1 + (i/n)]n – 1.
In this formula, i = the stated or nominal annual interest rate and n = the number of compounding periods of the instrument.
This formula lets you compare the yields of different instruments.
Here’s an example:
Investment A yields a 10% nominal rate, and it’s compounded monthly
Investment B yields a 10.1% nominal rate, compounded semi-annually (every six months)
For investment A, this would be: 10.47% = (1 + (10% / 12)) ^ 12 - 1
For investment B, it would be: 10.36% = (1 + (10.1% / 2)) ^ 2 – 1
As you see, A has a higher EAR, even though B’s nominal rate is higher, because it compounds more frequently.
You can calculate this yourselves in Xcel or with a financial calculator, or use an online calculator.
Here’s a calculator:
https://www.calculatorsoup.com/calculators/financial/effective-annual-rate-calculator.php (Links to an external site.)
Next, you need to calculate YTM (Yield to Maturity) if held to maturity (depending on the instrument) and if held for a year from the selection date (12 months). The formula is:
YTM = n√Face value/Current Price – 1. n = number of years to maturity. If you apply this for a year, n = 1, so you use the square root of the ratio. If the maturity date is higher, you use the higher order root.
Here’s a calculator, one of many you can find on the internet:
https://www.investopedia.com/calculator/aoytm.aspx (Links to an external site.)
Once you’ve calculated this for the instruments you select (You need at least three, and you can weed out similar instruments with comparable or lower yields.), add up the totals for each to provide the interest income from investments. Note the constraints in the case study, i.e., interest rates likely will rise, and bond prices will fall, and you may select no more than 40% of the total $2.5 million investment in instruments with maturities longer than a year.
I hope it’s clear that there’s no precisely correct answer to this. What you want to do is produce favorable income from excess cash, more than you’ll make letting it sit in a normal account.