CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers
A company issues 180-day commercial paper with a face value of $5,000,000 and receives $4,900,000. The bond-equivalent yield, using a 365-day year, is closest to:
The 180-day holding period yield is 100,000 divided by 4,900,000, or 2.04%. Annualizing by 365/180 gives about 4.14%. Using face value as the base, or skipping annualization, understates the yield the investor actually earns.
- A2.00%
- B4.00%
- C4.14%Correct
Explanation
Holding period yield = 100,000/4,900,000 = 2.0408%. Annualized on a 365-day basis = 2.0408% × 365/180 = 4.138%, about 4.14%. The 2.00% figure is the discount divided by face value for the period and is not annualized. The 4.00% figure annualizes that 2.00% on a 360-day-style basis and uses face value as the base, which understates the yield.
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