Question

You can buy commercial paper of a major U.S. corporation for $5,950,000. The paper has a face value of$6,000,000 and is 60 days from maturity.

2.Calculate bond equivalent yield on the commercial paper.

Answer 1

The bond equivalent yield of the commercial paper is calculated using a formula that takes into the account the face value, purchase price, and days to maturity, resulting in a yield of 5.11%.

Step-by-step explanation:

To calculate the bond equivalent yield on commercial paper, we can use the following formula: Bond Equivalent Yield = [(Face Value - Purchase Price) / Purchase Price] * (365 / Days to Maturity) In this case, the face value is $6,000,000 and the purchase price is $5,950,000. With 60 days to maturity, the bond equivalent yield can be calculated as: Bond Equivalent Yield = [($6,000,000 - $5,950,000) / $5,950,000] * (365 / 60) This results in a bond equivalent yield of: Bond Equivalent Yield = [$50,000 / $5,950,000] * (365 / 60) Bond Equivalent Yield = 0.008403361 * 6.08333333 Bond Equivalent Yield = 0.05110 or 5.11% The bond equivalent yield of the commercial paper is 5.11%, assuming there is no risk and it will be paid at face value on maturity.