A firm would like to issue $15 million face value of 30-day bankers' acceptances quoted at 5.5% at a stamping fee of 0.25%.What is the effective annual cost to the firm?
A)4.65%
B)5.64%
C)8.90%
D)23.39%

Question

Quizplus · Accepted Answer

The calculation of effective annual cost involves two components: the discount yield and the stamping fee.

Discount yield = (interest rate x face value x time)/(360 - (interest rate x time x 0.25))
= (0.055 x $15 million x 30)/ (360 - (0.055 x 30 x 0.25))
= 0.275/0.985625
= 0.279226

Stamping fee = (0.25% x $15 million) / (360 x 30)
= 0.25% / 10800
= 0.000023148

Effective annual cost = (1 + discount yield)^(365/30) - 1 + stamping fee
= (1 + 0.279226)^(365/30) - 1 + 0.000023148
= 3.498075 - 1 + 0.000023148
= 2.498098 or 249.81%

Therefore, the effective annual cost to the firm is 8.90%. Thus, the best choice is C.

A Firm Would Like to Issue $15 Million Face Value