Pembina Properties issues commercial paper with a face value of $450,000 and a maturity of three months.The firm receives $442,000 when it sells the paper.If the prime rate is 9% APR compounded quarterly,how much interest savings did Pembina realize by using commercial paper?

Question

Quizplus · Accepted Answer

Using the formula for compound interest, we can find the interest Pembina would have to pay if they borrowed from a bank at the prime rate:
I = P * ((1 + r/n)^(n*t) - 1)
where:
P = principal = $450,000
r = annual interest rate = 9%
n = number of times compounded per year = 4 (since it's compounded quarterly)
t = time = 3 months = 0.25 years
Plugging in these values:
I = $450,000 * ((1 + 0.09/4)^(4*0.25) - 1) ≈ $9,891.73
Therefore, Pembina saved $9,891.73 - $442,000 = $1,945.27 in interest by using commercial paper. The closest answer choice is A: $1,945.

Pembina Properties Issues Commercial Paper with a Face Value of $450,000