A firm issues three-month commercial paper with a $1,000,000 face value and pays an EAR of 7.4%.What is the amount the firm receives?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) of 7.4% needs to be converted to a quarterly rate. The quarterly rate is approximately 1.8% (since (1 + 0.074)^(1/4) - 1 ≈ 0.018). The firm receives the present value of the face value, which is $1,000,000 / (1 + 0.018) ≈ $982,318.

A Firm Issues Three-Month Commercial Paper with a $1,000,000 Face