Question

Suppose that $10 million face value commercial paper with a 260-day maturity is selling for $9.72 million. What is the EAR on the paper?

Select one
a. 4.07 percent
b. 4.42 percent
c. 4.37 percent
d. 4.18 percent
e. 4.20 percent
f. 6.28 percent

Answer 1

The question pertains to Business, specifically the calculation of EAR on a $10 million piece of commercial paper sold at $9.72 million with 260-day maturity. The EAR, calculated using the given formula and provided information, is approximately 4.18%.

Step-by-step explanation:

The subject of the question is Business, specifically focusing on finance and the calculation of the Effective Annual Rate (EAR) on a piece of commercial paper. To calculate the EAR for the commercial paper described in the question, which has a face value of $10 million and is selling for $9.72 million with 260 days to maturity, we use the formula:

EAR = (1 + (Face Value - Purchase Price) / Purchase Price) ^ (365 / days to maturity) - 1

Substituting in the given values, we get:

EAR = (1 + ($10,000,000 - $9,720,000) / $9,720,000) ^ (365 / 260) - 1

Calculating this results in an EAR of approximately 4.18%.

This question required an understanding of how interest rates and yield relate to the selling price of bonds and commercial paper. A rise in interest rates generally causes bonds with lower rates to sell below face value, while a fall in interest rates makes them sell above face value.