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

A corporation issues 90-day commercial paper with a face value of USD 10,000,000 at a discount yield of 4.80% on a 360-day basis. What is the amount of cash the issuer receives at issuance?

Proceeds equal face value less the discount. The discount is 10,000,000 times 4.80% times 90/360, which is 120,000. The issuer therefore receives 9,880,000 dollars. Forgetting to scale the rate to the 90-day term would wrongly give 9,520,000.

  1. AUSD 9,880,000Correct
  2. BUSD 9,520,000
  3. CUSD 9,885,000
  4. DUSD 9,882,000

Explanation

Discount = 10,000,000 x 4.80% x 90/360 = 120,000. Proceeds = 10,000,000 - 120,000 = 9,880,000. Option USD 9,520,000 treats the discount as a full year of 4.8%, ignoring the 90/360 fraction. The other options are arbitrary miscalculations.

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