Western Appliance Inc.has planned a 3-month issue of commercial paper with a face value of $15,000,000.The paper is set to sell at 98.% of face value.What is the EAR?

Question

Quizplus · Accepted Answer

To find the EAR, we need to first calculate the discount yield (DY) as:

DY = (Face value - Selling price) / Face value * (360 / Number of days to maturity)

DY = (15,000,000 - (15,000,000 * 0.98)) / 15,000,000 * (360 / 90) = 0.042 or 4.2%

Then, we can use the following formula to find the EAR:

EAR = (1 + DY / m)^m - 1

Where m is the number of times the interest is compounded in a year, which is 4 in this case since the paper is issued for 3 months.

EAR = (1 + 0.042 / 4)^4 - 1 = 0.0842 or 8.42%

Therefore, the answer is A) 8.42%.