Round the answers two decimal places 8. Cost of commercial paper Commercial pape
ID: 2791251 • Letter: R
Question
Round the answers two decimal places
8. Cost of commercial paper Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 118-day commercial paper with a face value of $1.3 million. The firm has received initial proceeds of $1,281,814.
(Note: Assume a 365-day year.)
a.What effective annual rate will the firm pay for financing with commercial paper, assuming that it is rolled over every118 days throughout the year?
b. If a brokerage fee of $12,550 was paid from the initial proceeds to an investment banker for selling the issue, what effective annual rate will the firm pay, assuming that the paper is rolled over every 118 days throughout the year?
Explanation / Answer
a)
EAR = ( (Face value - Amount received )/ Amount received ) * (365 / issue duration) *100
EAR = ((1300000 - 1281814)/1281814)*(365/118)*100 = 4.39%
b)
Amount received = 1281814 - 12550 = 1269264
EAR = ((1300000 - 1269264)/1269264)*(365/118)*100 = 7.49%
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