
Explanation:
The most suitable day count convention for calculating the interest earned on a Treasury bond between July 1st and October 11th is 102 days / 181 days. This is because the actual number of days between July 1st and October 11th is 102 days, and the actual number of days between the semiannual interest payment dates (July 1st and January 1st) is 181 days. The day count convention is a method used in finance to calculate the amount of accrued interest or the present value when the next payment is due. When dealing with Treasury bonds, the actual/actual day count convention is used, which takes into account the actual number of days in the accrual and the actual number of days in the year.
Choice A is incorrect. The numerator of 100 days is not accurate as it does not correctly represent the number of days from July 1st to October 11th. The correct number of days should be 102.
Choice B is incorrect. While the denominator correctly uses a day count convention of 180 days, which is common for Treasury bonds, the numerator again incorrectly states that there are only 100 days between July 1st and October 11th when there are actually 102.
Choice C is incorrect. Although this choice correctly identifies that there are indeed 102 days between July and October, it incorrectly uses a day count convention of only 180 in the denominator. For U.S. Treasury bonds, a semiannual basis (two periods per year) should be used, which means we need to consider the actual number of days in the semiannual period.
Q.685 Tony Ingram is a junior portfolio analyst at BBV Pension Fund Inc. The pension fund invests in assets such as Treasury bonds, municipal bonds, and other less risky assets. BBV's portfolio contains a Treasury bond of the U.S. government that pays semiannual interest of 7% on January 1st and July 1st. If Ingram wants to calculate the interest earned on the Treasury bond between July 1st and October 11th, 2021, then which of the following day count convention is most suitable?
A
100 days / 184 days
B
100 days / 180 days
C
102 days / 180 days
D
102 days / 181 days
No comments yet.