Question

Use the following information from the Wall Street Journal to answer questions 1 and 2.

(A) 90-day Commercial Paper 0.250%

(B) 90-day Negotiable CD 0.250%

(C) 90-day Bankers’ Acceptance 0.320%

(D) 90-day T-bill 0.100%

1. For each of the four investments (A) through (D) above, what is the cost (i.e., initial cash outlay) per $1,000,000 of this investment? (Hint: For non-bank discount instruments, it will be $1,000,000! For bank-discount instruments it will be less than $1,000,000!!) (5 points )

(A)

(B)

(C)

(D)

Answer 1

(A) Commercial paper is traded on a discount

Cost (i.e., initial cash outlay) per $1,000,000 of investment. Let the cost be C

C*(1+0.00250*90/360) = 1000000

C = $999375.39

(B) Negotiable CD are issued at par. Hence the cost per $1,000,000 = $1,000,000

(C) Banker's acceptance is traded on a discount

Cost (i.e., initial cash outlay) per $1,000,000 of investment. Let the cost be C

C*(1+0.00320*90/360) = 1000000

C = $999200.64

(D)

T-bills are traded on a discount

Cost (i.e., initial cash outlay) per $1,000,000 of investment. Let the cost be C

C*(1+0.001*90/360) = 1000000

C = $999750.06