Question

As a part of your financial plan for retirement, you purchased a 270-day $25000 commercial paper...

As a part of your financial plan for retirement, you purchased a 270-day $25000 commercial paper on its due date of issue, july14, 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? Show it using a timeline

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Answer #1

Answer : 2.96%

We need to calculate purchase price :

Step 1:

Let assume that purchase price is X

X + (X× 2.94 × 270) ÷ (100 ×365) = 25,000

X+ 0.02174795X = 25,000

X (1. 0.02174795) = 25,000

X =$24,467.87

Step 2:

The commercial paper sold after 234 days when market yield was 2.76%,

time to mature is = 270 – 234 = 36 days

Let us assume selling price is X

X + (X × 2.76 × 36) ÷ (100 × 365) = 25,000

X (1 + 0.00272219178) = 25,000

X = 24,932.13

Step 3:

So, return from investment = Sell Price – Purchase price

= $24,932.13 - $24,467.87

=$464.26

Therefore

Rate of return from investment = (464.26 × 100) ÷ (24,467.87 × 234/ 365)

= 2.96%

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