Final answer:
a. The ask discount yield on the commercial paper is 0.83%, b. The bond equivalent yield on the commercial paper is 4.98%, c. Commercial paper issuers require a credit rating to establish credibility and risk assessment.
Step-by-step explanation:
a. To calculate the ask discount yield on the commercial paper, we need to determine the discount that the buyer is receiving by purchasing the paper at a price lower than its face value. The discount is calculated by subtracting the purchase price ($5,950,000) from the face value ($6,000,000), resulting in a discount of $50,000. Next, we need to determine the discount yield, which is the discount divided by the face value. So, the ask discount yield would be $50,000 divided by $6,000,000, which is 0.0083, or 0.83%.
b. To calculate the bond equivalent yield on the commercial paper, we first need to convert the ask discount yield into an annual yield by multiplying it by the number of periods in a year. In this case, as the paper is 60 days from maturity, we consider a year to have 360 days. Thus, the annual yield would be 0.83% multiplied by (360/60), which is 4.98%.
c. Commercial paper issuers usually require a credit rating of their issue because it helps to establish the credibility and creditworthiness of the issuer. A credit rating is an evaluation of the issuer's ability to repay its financial obligations. It provides potential investors with an indication of the issuer's default risk and helps them make informed investment decisions.