Pacific Motors Inc.plans to issue $3,000,000 of commercial paper with a 6-month maturity at 98% of par value.What is the EAR?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + (discount rate / number of periods))^number of periods - 1. The discount rate is 2% (100% - 98%), and since the maturity is 6 months, there are 2 periods in a year. EAR = (1 + 0.02/1)^2 - 1 = 0.0404 or 4.12%.