Question

Criss-Cross Manufacturers will issue commercial paper for a​ short-term cash inflow. ​ Criss-Cross must raise ​$5 comma 900 comma 000​, and the paper will have a maturity of 182 days. If this paper has a maturity value of ​$50 comma 000 and is selling at an annual interest rate of 8.5 %​, what are the proceeds from each​ paper; that​ is, what is the discount rate on the commercial​ paper?

Answer 1

The correct answer for discount rate is 95.75% and paper required is 123.24.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Amount to raise = $5,900,000

Maturity time = 182 days

Maturity value = $50,000

Interest rate annual = 8.5%

So, interest rate for maturity time = 8.5% ÷ 2 = 4.25%

So, Discount rate = 100% - 4.25%

= 95.75%

So, selling price of each paper = Maturity value × Discount rate

= $50,000 × 95.75%

= $47,875

So, number of paper required to raise the amount required are as follows:

Number of paper required = Amount to raise ÷ selling price of each paper

= $5,900,000 ÷ $47,875

= 123.24 papers