If a firm issues $5 million of commercial paper with a maturity of three months at an annual interest rate of 8%, the proceeds of the issue are:
A)$4,900,000.
B)$4,629,630.
C)$4,901,961.
D)$4,600,000.

Question

Quizplus · Accepted Answer

The proceeds from the issue can be calculated by considering the interest that will be paid over the three-month period and subtracting it from the face value of the commercial paper. The annual interest rate is 8%, so for three months (which is a quarter of a year), the interest rate would be 8% / 4 = 2%. The interest paid would be $5,000,000 * 2% = $100,000. Therefore, the proceeds from the issue would be the face value minus the interest, which is $5,000,000 - $100,000 = $4,900,000. However, this calculation assumes the interest is deducted upfront (discount basis), which is a common practice for commercial paper. To find the actual proceeds, we use the formula for the present value of a single sum, which in this case is the face value of the commercial paper: Proceeds = Face Value / (1 + r), where r is the interest rate for the period. Thus, Proceeds = $5,000,000 / (1 + 0.02) = $5,000,000 / 1.02 = $4,901,961.

If a Firm Issues $5 Million of Commercial Paper with a Maturity