The Native Industries,Inc.is going to issue 180-day commercial paper to raise $25 million.It anticipates a discounted interest rate of 13 percent,and dealer placement costs of approximately $60,000.What is the effective annual cost of credit to Native Industries?
A) 13.46%
B) 14.06%
C) 14.45%
D) 15.38%

Question

Quizplus · Accepted Answer

The effective annual cost of credit considers the discount rate and the placement costs. The formula for the effective annual rate (EAR) is: EAR = [(1 + (discount rate + placement cost/face value))^(365/180)] - 1. Calculating this gives approximately 14.45%.