The Real mine Company has just issued some commercial paper with a par value of

Question

The Real mine Company has just issued some commercial paper with a par value of $3 million. This paper has a maturity of 85 days and the required return in the commercial paper market is 1.97%. What is the effective annual rate of interest that Real mine is paying on this commercial paper? 2. Use the purchasing power parity theory to work this problem. Webster Jensen owns an exotic pet shop. He plans to take a trip to India to purchase 3 parakeets. Each parakeet cost 5,000 rupees. In India a chicken cost 20 rupees. In the U.S. a chicken costs $2. Webster has $1,000 in cash that he can use to purchase the parakeets. If this $1,000 is more than enough to buy the parakeets, Webster plans to use the excess to purchase Indian carvings. a. How much, if anything, can Webster spend on Indian carvings? Give answer in rupees. b. How much additional money, if any, must he come up with in order to buy the 3 parakeets? Give answer in dollars. 3. What does the 0.879 in the notation below tell you pesos If rand/pesos0.0964, dinar ' What is 1/3 of a rand equal to?

Explanation / Answer

a) Given that the required rate of return is 1.97% for 85 days.
Therefore, annual required rate of interest for commercial paper = (1.97% ÷ 85 days) * 365 days = 8.4594%

Now, calcuating the effective rate of return assuming continuos compounding, we use the following formula:
i=e^r1
Here, r = 0.084594
i = 1.088275 - 1
i = 0.088275

Effective annual rate of interest = 8.8275%

b)

1 chicken costs $2 in US and Rs. 2000 in India.
Using the purchasing power parity, $2 = Rs. 2000.
Therefore, $1 = Rs. 10

Now, given that Webster has $1000 in cash which he is to use for the purchase of Parakeet.
$1000 = Rs. 10,000
Given that he needs to buy 3 parakeets which costs Rs. 5000 each.
Therefore, the cash he has will not be sufficient to buy the parakeets and he will not be able to spend on Indian Carvings. He will have to add Rs. 5000 of $500 to buy all 3 parakeets.

c)

1 rand = 0.879 pesos
In other words, 1/0.879 rand = 1 pesos
1 pesos = 1.13765 rands

1 rand = 0.0964 dinar
1/3 rand = 1/3*0.0964 dinar
1/3 rand = 0.032133

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