ACCA Applied Skills · Financial Management · The nature and role of money markets
A company issues 90-day commercial paper with a face value of $1,000,000 at a price of $985,000. What is the annualised simple yield, using a 360-day year and the issue price as the base?
The annualised simple yield is 6.09%. The discount of $15,000 divided by the $985,000 issue price gives 1.5228% for 90 days, and multiplying by 360/90 gives 6.09%. Using the $1,000,000 face value as the base would wrongly give 6.00%.
- A6.00%
- B6.09%Correct
- C1.52%
- D6.17%
Explanation
Interest = 1,000,000 − 985,000 = 15,000. Return for 90 days on the issue price = 15,000/985,000 = 1.5228%. Annualised: 1.5228% × 360/90 = 6.09%. Using face value as the base gives 6.00%, which is wrong because the amount invested is the issue price.
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