Question

Question 1:

Investors invested $800,000 in 60 days Commercial paper has 3 % discount yield on an equivalent size and risk 60 days CD has 3% single payment yield.

2] Convert the Commercial paper to Bond

3] Calculate CD (commercial paper and CD with equivalent risk and yield)

4] Calculate EAR (Effective annual return) since you know the bond equivalent yield on #2 to determine the market yield

Answer 1

2. maturity value of a bond sold on $800000 in 60 days @ 3% rate ( assumtion 1 year = 360 days)

Rate of Intrest = Face Value - Net amount realized/ Net amount realized * 360/ Maturity Period

3/ 100 = 800000 - x/x * 360/60

x= $796000 so it is a deep discount bond.

3. Yeild of certificate of deposit = 800000(1+3/100)^ 60/360

= $803,896.56

4. effective annual return = (1+ i/n)n -1, where i = nominal intrest rate, n = number of period = 360/60 = 6

= (1+ 3/100 *6)6 -1

= 3.037751 %