Vancouver Ventilation issues commercial paper with a face value of $2 million and a maturity of six months.The firm receives $1,950,000 when it sells the paper.If the prime rate is 7.5% APR compounded quarterly,how much interest savings did Vancouver Ventilation realize by using commercial paper?

Question

Quizplus · Accepted Answer

First, we need to calculate the interest the firm would have to pay if it borrowed the money at the prime rate for six months:
7.5%/4 = 1.875% per quarter
So, the total interest the firm would have to pay is:
$2,000,000 x 1.01875^2 - $2,000,000 = $38,811.25
Now, we need to calculate the interest the firm paid on the commercial paper:
$1,950,000 x 1.01875^2 - $1,950,000 = $15,000
Finally, we can calculate the interest savings:
$38,811.25 - $15,000 = $23,811.25, which is approximately $23,811. Therefore, the correct answer is C.

Vancouver Ventilation Issues Commercial Paper with a Face Value of $2