Question

Commerzbank in seeking to invest $100 million short te m. It has the choice between buying Euro- CP yielding 6.34 percent annually and a U.S. bank deposit yiel ding 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 calcu lated on a 365-day year. 5. 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 prefered investment? Explain. (5 marks)

Answer 1

DATE ! Given, Amount to invest - Market vake -$100 000 000 Euro-CP Tielding = 6.34%.p.a. US Bank Deposit Yielding = 6.54% p.a. No. of days:n= 1 So days Calculation of Euro-CP in terms of face value. Face Value = Market value 2 (1+ Euro-CP Yield 360days = 100000000 X (1+0.0634x ) = $10 26416671– then. b) If investment made in Euro-CP Yield for iso days ICO Euro-CP Yield = 6.34% 15 days = 2.64% If investment made in us Bank Deposit then Yield for 150 days US Bank Deposit Yield = 6.54 x 5 days = 2-69%. As Yield for 150 days by investing in Us Bank Deposit lis more it is preferred for Commerzbank to invest in US Bank Deposit.