Commercial paper. Criss-Cross Manufacturers will issue commercial paper for a short-term cash ...
Commercial paper. Criss-Cross Manufacturers will issue commercial paper for a short-term cash inflow. Criss-Cross must raise $5,500,000, and the paper will have a maturity of 182 days. If this paper has a maturity value of $50000 and is selling at an annual interest rate of 8.2%, what are the proceeds from each paper; that is, what is the discount rate on the commercial paper?
Homework Answers
Annual interest rate of Commercial paper = 8.2% or 0.082
182 days rate = 0.082 * 182/365 = 0.040887671
Commercial paper maturity value or par value = $50,000
Proceeds from Commercial paper formula = Par value * 1/(1+i for time of issue)
50000 *1/(1+0.040887671)
=48,035.92
So, proceeds from commercial paper is $48,035.92
Discount = 50000-48035.92
=1964.02
Discount rate on commercial paper is $1964.02./50000 = 0.039282
So, discount rate is 3.93%
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