In a situation where a t-bill with face value $10,000 and 95 days to maturity is selling at a bank discount ask yield of 4.2%, then the price of the bill will be $9,889.17.
A bank discount can be referred to or considered as the service offered by a bank to grant the amount of a T-bill to the customer, and hold the right to collect the actual amount of T-bill upon its maturity.
From the given information and formula, it can be ascertained that
Bank Discount = Rate x (Days / 365)
Bank Discount = 0.0420 × (95/365) = 0.011
Solving further, the price of the T-bill according to its face value will be,
Price = Face value x (1 – bank discount)
Price = 10000 x (1 – 0.011)
Price = $9,889.
Therefore, the significance regarding the bank discount has been aforementioned.
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