Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 10 percent.

Question

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The effective annual rate (EAR) of interest is calculated considering the discount and the term of the commercial paper, which in this case does not approximate to 10 percent. The calculation involves determining the interest cost ($75), annualizing it based on the term (60 days), and considering the initial investment amount ($9,925), which results in an EAR different from 10 percent.

Tangshan Mining Issued $10,000 of Commercial Paper for $9,925 for 60