A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for $1,900,000. The annual interest rate on the issue of commercial paper is ________ (assume 360 days in a year).

Question

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The annual interest rate can be calculated using the formula for the discount yield: $$ \text{Discount Yield} = \left( \frac{\text{Face Value} - \text{Purchase Price}}{\text{Face Value}} \right) \times \left( \frac{360}{\text{Days to Maturity}} \right) $$ Substituting the given values: $$ \text{Discount Yield} = \left( \frac{2,000,000 - 1,900,000}{2,000,000} \right) \times \left( \frac{360}{90} \right) = 0.05 \times 4 = 0.2105 $$ or 21.05 percent.

A Firm Issued $2 Million Worth of Commercial Paper That