Gamma,Inc.plans to sell $1 million in 270-day-maturity commercial paper on which it will pay discounted interest at an annual rate of 12%.In addition,Gamma expects to incur a cost of $1,000 in dealer placement fees and other expenses to issue the paper.What is the effective cost of the paper to Gamma?

Question

Quizplus · Accepted Answer

The effective cost of the paper includes both the interest and the additional expenses. The interest is calculated on a discounted basis, and the expenses are added to the interest to find the total cost. The effective annual rate is then calculated based on this total cost.

Gamma,Incplans to Sell $1 Million in 270-Day-Maturity Commercial Paper on Which