Question

1- You can buy commercial paper of a major US corporation for $498k. The paper has face value of $500k and is 45 days from maturity.

A- Calculate the discount yield on the CP.

B- Calculate the bond equivalent yield on the CP.

Answer 1

First we need to calculate Discount yield

Given

CP price= 498k

FV = 500k

maturity time =45 days

Discount yield formula

(note for simplicity 360 days used instead of 365)

Discount yield= (500-498/500)*(360/45)

Discount yield = 0.032 or 3.2 %

Now we need to calculate bond equivalent yield

Bond equivalent yield = (par value - purchase price/ purchase price)*(360/d)

= ((500-498)/498)*(360/45)

=(2/498)*360/45

=0.03212 or 3.212%