Gale Corporation recently issued 270-day commercial paper with a face value of $100,000 and a simple interest rate of 11 percent. Assuming there are 360 days in a year, what is the commercial paper's annual percentage rate (APR)? The firm incurs no transaction costs to issue the commercial paper.

Question

Quizplus · Accepted Answer

To calculate the APR, we need to convert the simple interest rate to a compound interest rate. Using the formula for calculating compound interest rate, we get:

APR = (1 + simple interest rate x days in year / face value) ^ (365/days in year) - 1

APR = (1 + 0.11 x 270/100,000) ^ (365/360) - 1

APR = 0.1199 or 11.99%

Therefore, the correct answer is A) 11.99%.

Gale Corporation Recently Issued 270-Day Commercial Paper with a Face