Question

Problem 8 Intro Cumulus Corp. has issued commercial paper with a face value of $1,000,000 and a maturity of 5 months. The net proceeds of the issue were $983,791 Attempt 1/5 for 10 pts Part 1 What is the effective annual rate of the commercial paper? 3+ decimals Submit

Answer 1

We use financial calculator to calculate ytm

Inputs: FV= 1,000,000

PV= -983,791

N = 5 months / 12 = 0.4167 years

Pmt = 0

I/y (ytm) = Compute

We get , YTM = 4%

Effective Annual rate = ( 1+ ytm/m)^m - 1

Inputs: ytm = 4%

M= 12 as it is monthly

Put it in the value

= ( 1+ 0.04/12)^12 -1

= ( 1+0.0033)^12 -1

= (1.0033)^12 -1

= 1.40742 - 1

= 0.40742 or 4.0742%