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

Name: Underworld Inc.plans to issue $10,000,000 of commercial paper with a 6-month maturity at 98% of par value.What is the EAR?
Brand: Quizplus
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Question

Quizplus · Accepted Answer

EAR = [(1 + (Discount Rate / (1 - Discount Rate))) ^ (365 / Days to Maturity)] - 1. Here, Discount Rate = (100% - 98%) = 2%, Days to Maturity = 180. EAR = [(1 + (0.02 / (1 - 0.02))) ^ (365 / 180)] - 1 ≈ 4.12%.