Question

A firm issues six-month commercial paper with $500,000 face value and receives $488,000. What is the EAR the firm is paying for these funds? Group of answer choices

Answer 1

5.03%

Step-by-step explanation:

In order to compute the effective annual rate on the commercial paper,we need to first of all establish the interest rate in the six-month instrument

interest=($500,000-$488,000)/$488,000=2.46%

Effective annual rate=(1+2.46% /6)^12-1

By dividing by six, we are reducing the rate to monthly terms

By raising to the power of 12 we are converting from a monthly rate to yearly rate

Effective annual rate=5.03%