Question

A firm in need of medium-term funding for approximately 1.5 years issues an $13,500,000 commercial bill with a 180-day rollover facility provided by a commercial bank. Assume 365 days in a year. (a) If the yield at issue is 5.31%, what proceeds will the firm receive for the primary issue of the bill? $ (Round to 2 decimal places, and don't insert a comma into your answer. For example, use 1000, not 1,000) (b) On the first roll-over, if the yield at that time was 6.31%, how much will the firm have to pay the bank to execute the roll-over facility (i.e., the rollover fee)? $ (Round to 2 decimal places, and don't insert a comma into your answer. For example, use 1000, not 1,000)

Answer 1

Answer:$331,271.10

Step-by-step explanation:

The principal amount of the commercial bill: $13,500,000

Yield at issue: 5.31%

Rollover period: 180 days

The yield on the first roll-over: 6.31%

(a) Proceeds from the primary issue of the bill:

The formula to calculate the proceeds from the primary issue of the bill is:

Proceeds = Principal amount / (1 + (yield/100) * (days/365))

Substituting the values into the formula:

Proceeds = $13,500,000 / (1 + (5.31/100) * (180/365))

Proceeds ≈ $13,331,271.10

Therefore, the firm will receive approximately $13,331,271.10 for the primary issue of the bill.

(b) Rollover fee on the first roll-over:

The rollover fee can be calculated as the difference between the face value of the bill and the amount the firm receives from rolling over the bill.

Face value of the bill: $13,500,000

Amount received from rolling over: Proceeds from the primary issue + Principal amount

Amount received from rolling over = $13,331,271.10 + $13,500,000

Rollover fee = Face value of the bill - Amount received from rolling over

Rollover fee = $13,500,000 - ($13,331,271.10 + $13,500,000)

Rollover fee ≈ -$331,271.10

Therefore, the firm will not have to pay a rollover fee on the first roll-over; instead, it will receive approximately $331,271.10 as a discount on the roll-over.