A firm issues four-month commercial paper with a $500,000 face value and pays an EAR of 8.26%.What is the amount the firm receives?

Question

Quizplus · Accepted Answer

To find the amount the firm receives, we need to calculate the present value of the commercial paper, considering the effective annual rate (EAR) of 8.26%. The formula for the present value (PV) is PV = FV / (1 + r)^n, where FV is the face value, r is the EAR, and n is the time in years. For a four-month period, n = 4/12 = 1/3 year. Plugging the values into the formula gives PV = $500,000 / (1 + 0.0826)^(1/3), which calculates to approximately $486,946.

A Firm Issues Four-Month Commercial Paper with a $500,000 Face