A firm issues six-month commercial paper with $100,000 face value and pays an EAR of 6.7%.What is the amount the firm receives?

Question

Quizplus · Accepted Answer

The amount the firm receives can be calculated by discounting the face value by the EAR. 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. Since the EAR is 6.7% (or 0.067 as a decimal) and the commercial paper is for six months (or 0.5 years), the calculation is $100,000 / (1 + 0.067)^0.5 = $96,809.

A Firm Issues Six-Month Commercial Paper with $100,000 Face Value