Question

Find the effective annual cost (%) of a commercial paper issue. Assume a company issues $900,000 commercial paper with 210-day maturity at a discount of 3.8%, the annualized dealer fee is 0.10% and the cost of backup line of credit is 0.11%

Answer 1

Solution:

a)Face Value=$900,000

b)Discount=Face Value*(Discount rate/360*210)

=$900,000*(3.8%/360*210)

=$19,950

c)Issue Price=$900,000-$19,950

=$880,050

d)Dealer Fee=Face Value*Rate*days/360

=$900,000*0.10%*210/360

=$525

e)cost of backup line of credit=Face Value*Rate*210/360

=$900,000*0.11%*210/360

=$577.50

Total cost=b+d+e

=$19,950+$525+$577.50

=$21052.50

Effective Annual cost(%)=(Total cost/Issue Price)*360/210

=($21052.50/$880,050)*360/210

=0.041 or 4.1%