Overstock Inc.plans to issue $10,000,000 of commercial paper with a 6-month maturity at 98% of par value.What is the 6-month interest rate?

Question

Quizplus · Accepted Answer

To find the 6-month interest rate, we can use the following formula:

Interest = (Face Value - Purchase Price) / Purchase Price x (360 / Days to Maturity)

Plugging in the given values, we get:

Interest = ($10,000,000 - $9,800,000) / $9,800,000 x (360 / 180) 
Interest = $200,000 / $9,800,000 x 2 
Interest = 0.0408 or 4.08%

Therefore, the 6-month interest rate is 4.08%. The closest answer choice is B, 2.04%. This is because the 6-month interest rate is half of the annualized rate, so we divide the calculated interest rate by two to get 2.04%.