Galt Industries has issued four-month commercial paper with a $8 million face value.The firm netted $7,831,000 on the sale.The effective annual rate for this financing is closest to:

Question

Quizplus · Accepted Answer

To calculate the effective annual rate, we need to first calculate the discount yield:

Discount yield = (face value - net proceeds) / face value * (360 / days to maturity)
            = (8,000,000 - 7,831,000) / 8,000,000 * (360 / 120)
            = 0.02124 or 2.124%

Then, we can use the following formula to calculate the effective annual rate:

EAR = (1 + discount yield * (days in a year / days to maturity)) ^ (days to maturity / days in a year) - 1
    = (1 + 0.02124 * (360 / 120)) ^ (120 / 360) - 1
    = 0.066 or 6.6%

Therefore, the closest effective annual rate for this financing is 6.6%, which corresponds to choice B.

Galt Industries Has Issued Four-Month Commercial Paper with a $8