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

A bank issues 90-day commercial paper with a face value of USD 50,000,000 at a discount rate of 4.80% on a 360-day basis. What are the proceeds the bank receives at issuance?

The proceeds are USD 49,400,000. The discount is face value times the discount rate times 90/360, which equals USD 600,000, and this is deducted from the USD 50 million face value because commercial paper is issued at a discount.

  1. AUSD 49,400,000Correct
  2. BUSD 48,800,000
  3. CUSD 49,000,000
  4. DUSD 49,412,000

Explanation

Discount = 50,000,000 x 4.80% x 90/360 = 600,000. Proceeds = 50,000,000 - 600,000 = 49,400,000. Using a 365-day basis would give a slightly different figure, and treating the 4.80% as a full-year discount gives 48,800,000... that is the wrong base.

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