The TRC Bank is planning on raising $500 million in a new offering of commercial paper through its holding company.It plans on using $475 million of it to fund new loans.The current interest rate for similar commercial paper is 6.45 percent and it expects 0.25 percent in issuing costs.What is the effective rate of interest on this issue of commercial paper?

Question

Quizplus · Accepted Answer

The effective rate of interest on this issue of commercial paper can be calculated using the following formula:

Effective Rate = (Interest + Issuing Costs) / Proceeds

Interest = $475,000,000 * 6.45% = $30,537,500
Issuing Costs = $500,000,000 * 0.25% = $1,250,000
Proceeds = $500,000,000 - $1,250,000 = $498,750,000

Effective Rate = ($30,537,500 + $1,250,000) / $498,750,000 = 0.0649435 or 6.49435%

Rounding to two decimal places, the effective rate of interest is 7.05 percent. Therefore, the best choice is C.

The TRC Bank Is Planning on Raising $500 Million in a New