Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.55 million. What is the BEY on the paper?

Question

Quizplus · Accepted Answer

First, we need to calculate the discount on the commercial paper which is the difference between the face value and selling price: $10 million - $9.55 million = $450,000

Next, we calculate the discount yield as follows: 
discount yield = discount / face value x 360 / days to maturity 
discount yield = $450,000 / $10 million x 360 / 270 
discount yield = 0.015 x 1.3333 
discount yield = 0.02 or 2%

Finally, we use the formula for the bond equivalent yield (BEY): 
BEY = (1 + discount yield)^(365/days to maturity) - 1 
BEY = (1 + 0.02)^(365/270) - 1 
BEY = 0.0637 or 6.37%

Therefore, the answer is C.

Suppose That $10 Million Face Value Commercial Paper with a 270-Day