Asian Motors Inc. plans to issue $3,000,000 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 calculate the 6-month interest rate, we need to use the following formula:
Discount rate = (Par value - Issue price) / Par value x (360 / number of days)
Substituting the given values in the formula, we get:
Discount rate = (Par value - Issue price) / Par value x (360 / number of days)
Discount rate = (3,000,000 - (0.98 x 3,000,000)) / 3,000,000 x (360 / 180)
Discount rate = 0.02 x 2
Discount rate = 0.04 or 4%
Therefore, the 6-month interest rate is 4%. However, we need to remember that commercial paper rates are typically quoted on an annual basis, so the effective annual rate would be 8%.

None of the given choices exactly matches the calculated 6-month interest rate, but the closest choice is C with a rate of 2.04%. Therefore, the best choice would be C, although it is not the exact answer.