Question

5. Commerzbank in seeking to invest $100 million short term. It has the choice between buying Euro- CP yielding 6.34 percent annually and a U.S. bank deposit yielding 6.54 percent annually, both maturing in 150 days. The Euro-CP yield is calculated on a 360-day year, whereas the U.S. bank deposit yield is calculated on a 365-day year. a. How much Euro-CP in terms of face value can Commerzbank's $100 million buy? (5 marks) b. Assuming that all else is equal, which is Commerzbank's preferred investment? Explain. (5 marks)

Answer 1

Given,

Market value = $ 100,000,000

Annual yield of Euro-CP = 6.34% or 0.0634

Annual yield of U.S. bank deposit = 6.54% or 0.0654

Maturity (n) = 150 days

Solution :-

Face Value - market value ( 1 + Annual Yield y no = $10000000 (1 + 0. 067 360 - $ 100000000 (1 + 0.02641662) = $ 100000000 (LOR641667) = $ 102641667 (b) Euro-CP Vield & Annual Vield xn - 6.34 % x - 2.64 % 360 Iso 360 365 Us-bank deposit yield – Annual Yield x Mac 6.54% x 150 – 2. 69% so, Commerzbank's Preferred investment is us-bank deposit.

Preferred investment is based on higher yield.