Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 103​-day commercial paper with a face value of $1.5 million. The firm has received initial proceeds of$1,473,557. (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 every 103 days throughout the​ year?b. If a brokerage fee of ​$13,986 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 every103 days throughout the​ year? Answersa. The effective annual rate the firm will pay for financing with commercial​ paper, assuming that it is rolled over every 103days throughout the​ year, is ___%.​(Round to two decimal​ places.)b. The effective annual rate the firm will pay with the brokerage​ fee, assuming that the paper is rolled over every 103 days throughout the​ year, is ___%.​(Round to two decimal​ places.)

Question
Asked Dec 13, 2019
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Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 103​-day commercial paper with a face value of $1.5 million. The firm has received initial proceeds of
$1,473,557. (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 every 103 days throughout the​ year?
b. If a brokerage fee of ​$13,986 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
103 days throughout the​ year?
 
Answers
a. The effective annual rate the firm will pay for financing with commercial​ paper, assuming that it is rolled over every 103
days throughout the​ year, is ___%.
​(Round to two decimal​ places.)
b. The effective annual rate the firm will pay with the brokerage​ fee, assuming that the paper is rolled over every 103 days throughout the​ year, is ___%.
​(Round to two decimal​ places.)
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Expert Answer

Step 1

a)

Computation of effective annual rate:

The effective annual rate is 6.51%.

Excel spread sheet:

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1 Amount borrowed $1,500,000 2 Initial proceeds 3 Effective rate $1,473,557 1.79% 3.54 4 Period of time 5 Effective annual rate 6.51%

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Step 2

Excel working:

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A 1 Amount borrowed =1.5*1000000 2 Initial proceeds 3 Effective rate 1473557 =(B1-B2)/B2 Period of time =365/103 4 5 Effective annual rate =(1+B3)^B4)-1

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Step 3

b)

Computation of effective annual rate:

The effective annual rate is 10.17%.

Excel spr...

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A 1 Amount borrowed 2 Initial proceeds 3 Brokerage fee 4 Effective rate 5 Period of time 6 Effective annual rate $1,500,000 $1,473,557 $13,986 2.77% 3.54 10.17%

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