Fruit Flavors Online Inc.plans to issue $5,000,000 of commercial paper with a 6-month maturity at 97% of par value.What is the 6-month interest rate?

Question

Quizplus · Accepted Answer

The price of commercial paper is calculated as follows: 
Price = Par value × (1 − Discount rate × Time in years)

Substituting the given values, we get: 
$4,850,000 = $5,000,000 × (1 − Discount rate × 0.5)

Solving for the discount rate, we get: 
Discount rate = (1 − Price/Par value) ÷ Time in years 
Discount rate = (1 − 0.97) ÷ 0.5 
Discount rate = 0.06 or 6%

Therefore, the 6-month interest rate is 6%/2 = 3.09% (since the annual interest rate is divided by 2 to get the semi-annual rate).

The best choice is C.