Question

Carborundum Metals issues commercial paper with a face value of $1,000,000 and a maturity of three months. Carborundum receives net proceeds of $992,000 when it sells the paper. If the prime rate is 8% APR compounded quarterly, how much savings in interest did Carborundum realize by accessing the commercial paper market? O A. $8,000 OB. $9,800 OC. $11,840 OD. $10,200

Answer 1

Solution The values provided in the question are as follows: face value = $1000,000 → (t) Maturity 3 months 13 1 Years (lyear= 12 month → (PV) Present Value = $ 992,000 — (i) Annual Rate of interest = 2% OR 0-08 Compounded Quarterly Demand d Question ? (A), saving in Interest = ryear 1 (1) Cakulation Number of periods (n) Numbei A berods (h) = Number of yearslith compounding Using the values, Number of bensodoen) 18 e years x 4 per year Number of Period (n) = (2) Calculation of Quarterly Rate of interest (?) Quarterly Rale of intereste = Annual Rate of interest ci) 4 (ilyear = 4x Quarter)

R 0.00 4 → 0.02 Quarterly Rate of interest (8) = 0.02 1 (3) Calculation of fullre value (FV) FVE PU x (1+x)" Using the values, FV $ 992,000 *(1+0.02) Fue $ 992,000 X 1.02 = $ 1011,840 Fulare Value (FV) = $ 1011,840 (A) Calculation of saving in Interest Saving in Interest Fuluse value (FV) face value using the values, Saving in in Interest = $1,011,840 - $1000,000 Saving in Interest = $ 11840 option 'C' will be correct