Final answer:
The Wonderful Bank's effective rate of interest for the new offering of commercial paper, after accounting for the nominal interest rate of 6.45 percent and issuing costs of 0.25 percent, is calculated to be 6.7 percent.
Step-by-step explanation:
To determine the effective rate of interest on the issue of commercial paper by The Wonderful Bank, we need to account for the nominal interest rate and the issuing costs associated with the paper. The bank is planning to issue $500 million in commercial paper at a nominal interest rate of 6.45 percent with 0.25 percent in issuing costs.
First, we calculate the total interest expense, which is the product of the nominal interest rate and the amount being raised:
- Interest expense = $500 million x 6.45% = $32.25 million
Next, we calculate the total issuing costs:
- Issuing costs = $500 million x 0.25% = $1.25 million
Now, add the issuing costs to the interest expense to find the total cost of borrowing:
- Total cost of borrowing = Interest expense + Issuing costs
- Total cost of borrowing = $32.25 million + $1.25 million = $33.5 million
Finally, to find the effective rate of interest, we divide the total cost of borrowing by the amount raised and convert it into a percentage:
- Effective rate of interest = (Total cost of borrowing / Amount raised) x 100%
- Effective rate of interest = ($33.5 million / $500 million) x 100%
- Effective rate of interest = 6.7%
The effective rate of interest for The Wonderful Bank's new offering of commercial paper is therefore 6.7 percent.