Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent credit risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized rates on short-term Treasury securities (T-bills)are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.
A)8.0
B)7.6
C)7.5
D)7.9
E)None of these are correct.

Question

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent credit risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized rates on  short-term Treasury securities (T-bills)are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.
A)8.0
B)7.6
C)7.5
D)7.9
E)None of these are correct.

Quizplus · Accepted Answer

Vaughn should offer a yield that combines the T-bill rate with the additional premiums it believes are necessary. The total yield is calculated as 7% (T-bill rate) + 0.2% (credit risk premium) + 0.1% (liquidity premium) + 0.3% (tax adjustment) = 7.6%.

Vaughn Corporation Is Considering the Issue of Commercial Paper and Would