Question

A company issues $100 million of CP with a 90-day maturity at a discount of 5.4%.
Fees include an annual dealer fee of 0.08% and a backup line of credit fee of 0.30%.

The usable funds are?

What is the prorated dealer fee?

What is the prorated backup line of credit fee?

What is the annual interest rate for the issuer?

What is the nominal, or annual, yield to the investor?

Answer 1

Prorated dealer fee = $100 million * 0.08%*90/360 = $20000

Prorated backup line of credit fee = $100 million * 0.30%*90/360 = $75000

Discount = $100 million *5.4%*90/360 = $1,350,000

Usable funds = $100 million - $20000- $75000 -$1350000 = $98,555,000

Annual Interest rate for issuer = (Total charges + Discount)/Usable funds * 365/90

=(20000+75000+1350000)/98555000*365/90

=5.9462%

Purchase price of Investors = $100 million - $1.35 million = $98.65 million

Nominal Yield to investor = 1.35 /98.65 *365/90= 5.55%