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Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the banker's acceptance to its bank, the discount rate is 1.00% per annum.
-Refer to Instruction 16.1. What is the size of the commission Cypress will pay the bank for the banker's acceptance?

Question

Quizplus · Accepted Answer

The commission Cypress will pay for the banker's acceptance is calculated as 1.4% of $1,000,000 for 6 months. The annual commission for $1,000,000 would be $14,000 (1.4% of $1,000,000), but since the payment is to be received in 6 months, the commission is halved, resulting in $7,000.

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