Life.com issued $8 million of commercial paper on April 1 on a nine-month note.

Question

Life.com issued $8 million of commercial paper on April 1 on a nine-month note. Interest was discounted at iss uance at a 12% discount rate Complete the below table to calculate the effective interest rate on the commercial paper. (Enter your answers in whole dollars. Round "Annual Effective Rate" to 1 decimal place. (i.e., 0.123 should be entered as 1.23).) Annual Principal xRate xTime Discount Calculation of discount$ 8,000,000 x 121% x 9/12 $ 720,000 9-month rate Conversion Factor 12/9 Annual Effective Rate Discount$ 720,000 Proceeds 0%

Explanation / Answer

a) Principal x Annual Rate x Time = Discount Calculation of discount $       80,00,000 x 12% x 9/12 = $ 7,20,000 b) 9-month rate x Conversion Factor = Annual Effective rate Discount              7,20,000 = 9.89% x 12/9 = 13.2% / Proceeds            72,80,000 Working: Total Value of Commercial Paper        80,00,000 Discount on commercial paper           7,20,000 Net Proceeds        72,80,000 9-Month Interest rate =           7,20,000 /                   72,80,000 = 9.89% Annual effective rate = 9.89% x 12/9 = 13.2%

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