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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank holding company issues 90-day commercial paper with a face value of USD 50 million at a discount yield of 4.80% using a 360-day year. What cash proceeds does it receive at issuance?

Proceeds equal face value less the discount. The discount is 50 million × 4.80% × 90/360, or USD 600,000, so the bank receives USD 49.4 million at issuance and repays the full USD 50 million at maturity.

  1. AUSD 49,400,000Correct
  2. BUSD 47,600,000
  3. CUSD 49,000,000
  4. DUSD 50,000,000

Explanation

Discount = 50,000,000 × 4.80% × 90/360 = 600,000. Proceeds = 50,000,000 − 600,000 = 49,400,000. Option USD 49,000,000 results from applying the rate on a full-year basis for 90 days incorrectly (e.g., 2% discount).

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