Tangshan Mining issued $1,000,000 of commercial paper for $992,500 for 45 days. Based on this information, the effective annual rate of interest on the commercial paper would be
A) 6.13%.
B) 6.29%.
C) 6.24%.
D) 6.08%.

Question

Quizplus · Accepted Answer

The formula for calculating effective annual rate (EAR) is as follows:

EAR = (1 + (Discount rate/n))^n -1

where n is the number of compounding periods in a year.

In this case, the discount rate is calculated as follows:

Discount = Face value - Purchase price = $1,000,000 - $992,500 = $7,500

The discount rate can be calculated as follows:

Discount rate = (Discount/Face value) x (360/45) = (7,500/1,000,000) x 8 = 0.06 or 6%

Thus, the EAR can be calculated as follows:

EAR = (1 + (0.06/1))^1 - 1 = 0.0629 or 6.29%

Therefore, the correct answer is B, 6.29%.

Tangshan Mining Issued $1,000,000 of Commercial Paper for $992,500 for 45