CMA Intermediate · Financial Management and Business Data Analytics · Money Market
A company issues commercial paper of face value Rs 5,00,000 for 90 days at a discount rate such that it receives Rs 4,85,000 on issue. Taking a 365-day year, the effective annualised yield to the investor (nearest 0.1%) is:
The effective yield is about 12.5%. The discount of Rs 15,000 is divided by the amount invested, Rs 4,85,000, giving 3.09% for 90 days, then annualised by 365/90. Dividing by face value would give 12.2%, which understates the true yield.
- A12.5%Correct
- B12.2%
- C3.0%
- D11.8%
Explanation
Discount = 15,000. Return on investment = 15,000/4,85,000 = 3.0928% for 90 days. Annualised = 3.0928% x 365/90 = 12.54%, about 12.5%. Using face value as the base gives 3.0% x 365/90 = 12.17%, about 12.2%, which is wrong. 3.0% is not annualised.
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