Final answer:
a. The ask discount yield on the commercial paper is 3%. b. The bond equivalent yield on the commercial paper is 7.5%. c. Commercial paper issuers require a credit rating to assess creditworthiness and attract investors.
Step-by-step explanation:
a. To calculate the ask discount yield on the commercial paper, first we need to find the discount amount. The discount amount is calculated by subtracting the purchase price from the face value of the paper: $6,000,000 - $5,950,000 = $50,000. Then, we divide the discount amount by the face value and multiply by 360 (representing the number of days in a year): ($50,000 / $6,000,000) * 360 = 3%. Therefore, the ask discount yield on the commercial paper is 3%.
b. The bond equivalent yield (BEY) is calculated by multiplying the ask discount yield by 2.5: 3% * 2.5 = 7.5%. Therefore, the bond equivalent yield on the commercial paper is 7.5%.
c. Commercial paper issuers usually require a credit rating of their issue because it provides an assessment of the creditworthiness of the issuer. A higher credit rating indicates a lower risk of default, which attracts investors and allows issuers to obtain financing at lower interest rates. Credit ratings help investors make informed decisions and provide an objective measure of the issuer's financial health and ability to repay the debt.