If a firm were to issue $5 million of commercial paper with a maturity of six months at an interest rate of 10%, the paper would sell at issue date for:
A)$5,000,000.
B)$4,500,000.
C)$4,761,905.
D)$4,750,000.

Question

Quizplus · Accepted Answer

The interest on the commercial paper would be $250,000 (10% x $5,000,000 x 0.5 year). Therefore, the amount received by the firm at issue date would be $4,750,000 ($5,000,000 - $250,000). However, the market price of the commercial paper would be lower than $4,750,000 to reflect the 10% annual interest rate for a maturity of only six months. Using the formula for the present value of a single sum with an annual interest rate of 10% and a maturity of 0.5 year (PV = FV / (1 + r)^t), the market price of the commercial paper at issue date would be approximately $4,761,905. Therefore, the best choice is C.

If a Firm Were to Issue $5 Million of Commercial