The price of the T-bills

3. a. The price of the T-bills is determined by Equation (1).
P = 1,000,000(1 — (.07)(30/360))
= l,000,000(.994167)
= 994,167
The Federal Reserve Bank shows both an asset and a liability to the commercial bank. In turn, the bank records an asset with an offsetting liability to the individual.
FEDERAL RESERVE BANK COMMERCIAL BANK
T—bills T—bills
$994,167 $994,167
Liability to Bank Liability to individual
$994,167 $994,167
b. The price is calculated as before, using the appropriate face value and rate.
P = 4,000,000(1 — (.069)(30/360))
= 4,000,000(.994250)
= 3,977,000
In this case, the Federal Reserve Bank has both an asset and a liability; the commercial bank has an asset but no offsetting liability.