Question

The Treadwater Bank wants to raise $ 1.00 million using​ three-month commercial paper. The net proceeds to the bank will be $ 985 comma 000. What is the effective annual rate ​(EAR​) of this financing for​ Treadwater?The EAR of this financing is ___ %.

Answer 1

effective annual rate = 6.22 %

Step-by-step explanation:

given data

future value = 1.00 million

present value = $985,000

time = 3 months

to find out

effective annual rate ​(EAR)

solution

we consider here interest rate for 3 month that is = x%

so now we calculate interest rate by present value and future value

present value = future value ÷ ( 1+ rate )

985000 =
`(1000000)/((1+x))`

x = 1.52 %

so effective annual rate will be

effective annual rate =
`(1+r)^(n-1)` ......................1

here r is rate i.e 1.52 % and n is 4 that is quarter in 1 year

so

effective annual rate =
`(1+0.0152)^(4-1)`

effective annual rate = 6.22 %