You are considering purchasing a $3,000,000, 90 day issue of commercial paper with a 3.5% discount yield. Calculate the effective yield, assuming the security is purchased on the issue date and held to maturity.

Question

Quizplus · Accepted Answer

The effective yield can be calculated using the formula for the effective annual yield (EAY) on a discount basis, which is EAY = (Discount / Purchase Price) * (365 / Days to Maturity). The discount is 3.5% of $3,000,000, which is $105,000. The purchase price is therefore $3,000,000 - $105,000 = $2,895,000. Plugging these values into the formula gives an effective yield of approximately 3.63%.

You Are Considering Purchasing a $3,000,000, 90 Day Issue of Commercial