Question

As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on its date of issue, July 14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. What rate of return did you realize on your investment?

Answer 1

At Purchase date

Market yield = {(Redemption value - Purchase price)*365*100/(Purchase Price*Term of commercial paper)}

2.94% = {($25,000 - Purchase Price)*365*100/(Purchase Price*270)}

793.8 Purchase Price = 912500000 - 36500 Purchase price

Purchase Price = 912500000/37293.8

Purchase Price = $24,467.87

At Sale date

Market yield = {(Redemption value - Current price)*365*100/(Current Price*Remaining Term of commercial paper)}

2.76% = {($25,000 - Current Price)*365*100/(Current Price*(270-234))}

99.36 Current Price = 912500000 - 36500 Current price

Current Price = 912500000/36599.36

Current Price = $24,932.13

Return on Investment = (Sale Price - Purchase price)*100/Purchase Price

Return on Investment = ($24,932.13 - $24,467.87)*100/$24,467.87

Return on Investment = 1.90% (or 2.96% p.a.)

Note: Assuming 2.94% and 2.76% given in question is annual rate.