Question

As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on...

As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on its date of issue, July 14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. What rate of return did you realize on your investment?

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Answer #1

Answer:

Market Yield is 2.94% | face value of commercial paper =$25,000 | Purchase at 270-day

We need to calculate purchase price. Let assume that purchase price is X

X + X × 2.94 × 270100 ×365 = 25,000

X+ 0.02174795X = 25,000

X (1. 0.02174795) = 25,000

X =$24,467.87

The commercial paper sold after 234 days when market yield was 2.76% and

time to mature is = 270 – 234 = 36 days

Lets assume sell price is X

X + X × 2.76 × 36100 ×365 = 25,000

X (1 + 0.00272219178) = 25,000

X = 24,932.13

So, return from investment = Sell Price – Purchase price

= $24,932.13 - $24,467.87 =$464.26

Rate of return from investment = 464.26 × 10024,467.87 ×(234365)= 2.96%

Answer: The rate of return relize from the investment is 2.96%.

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