Question

Nigel wants to raise funds by issuing eighty 180-day bank bills, each with a face value of $10 000. The current yield on such bank bills is 5.4% p.a. Nigel must pay $25 000 of fees and charges associated with this financing activity.

(A) Calculate the real cost of borrowing if fees and charges are paid on the date of issue. Express the cost as a rate of simple interest, as a percentage, rounded to 2 decimal places. Include a neatly drawn cash flow diagram that summarises Nigel’s transaction.

(B) Calculate the real cost of borrowing if fees and charges are paid on the maturity date. Express the cost a rate simple interest, as a percentage, rounded to 2 decimal places.

Answer 1

(A)

Bill Issue Price = 10,000

No. Of Bill=80

Current Yield =5.40%

Maturity period = 180 days

Acquisition charges = 25000 to be paid on the date of issue.

Interest = 5.4% x (10000x80)x180/ 365 = 21304.10

Net Amount Received = 10,000x80 - 25000= 775,000

Real Cost of Borrowing Absolute Rate (%)

=Interest x100/ Net Amt Received

= 21304.10/775,000 * 100 = 2.75 %

Real Cost of Borrowing Annualised Rate (%)

= 2.75 x 365 /180 = 5.58 %

(B)

Bill Issue Price = 10,000

No. Of Bill. =80

Current Yield =5.40%pa

Maturity period = 180 days

Acquisition charges = 25000 to be paid on the maturity date

Real Cost of Borrowing Absolute Rate (%)

= 21304.11/825,000 * 100 = 2.58 %

Real Cost of Borrowing Annualised Rate (%)

= 2.58 /180 * 365 = 5.23 %