Question

We bought a 90-day commercial paper with a face value of $6,000,000 at 3.98% p.a.

Question

A. How much did we pay for it? (round to 2 decimal point)

B. We hold the paper for 23 days and then sold it at a yield of 2.1% p.a. At what price did we sell? (round to 2 decimal point)

C. What rate of return (i.e. APR) did we earn over the holding period? (round to 2 decimal point)

Answer 1

a)

Amount Paid = PV of Face Value = Face Value[1+{Interest Rate*(Number of days/365)}] = 6000000[1+{0.0398*(90/365)}] = 6000000/1.0098137 = $5941690.04

b)

Days Remaining = 90-23 = 67

Amount Received = PV of Face Value = Face Value[1+{Interest Rate*(Number of days/365)}] = 6000000[1+{0.021*(67/365)}] = 6000000/1.00385479 = $5976960.05

c)

Holding Period Return = (Amount Received-Amount Paid)/Amount Paid = (5976960.05-5941690.04)/5941690.04 = 0.005936

APR = HPR*365/Days Held = 0.005936*365/23 = 0.0942 = 9.42%