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.)

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.)

(Round to two decimal places.)

Step 1

**a)**

**Computation of effective annual rate:**

The effective annual rate is** 6.51%.**

**Excel spread sheet:**

Step 2

**Excel working:**

Step 3

**b)**

**Computation of effective annual rate:**

The effective annual rate is** 10.17%.**

**Excel spr...**

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