FPL 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 99.5% of face value.What is the EAR?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + periodic rate)^(number of periods per year) - 1. The periodic rate is the discount rate for the 3-month period, which is (1 - 0.995) = 0.005 or 0.5%. Since there are 4 such periods in a year, the EAR = (1 + 0.005)^4 - 1 = 0.0202 or 2.025%.

FPL Inchas Planned a 3-Month Issue of Commercial Paper with a a Face