CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A firm issues 90-day commercial paper with a face value of $5,000,000 for proceeds of $4,900,000. Using a 365-day year, the annualized effective yield (compounded) is closest to:
The effective annual yield is about 8.5%, so the closest option is 8.4%. The 90-day holding period yield is 100,000/4,900,000 = 2.04%, which compounds over 365/90 periods to roughly 8.5%.
- A8.4%
- B8.7%Correct
- C9.2%
Explanation
Holding period yield = 100,000/4,900,000 = 2.0408%. Annualize: (1.020408)^(365/90) − 1. 365/90=4.0556; ln=0.020204×4.0556=0.081939; e^0.081939=1.0854, so 8.5%. Simple annualized: 2.0408%×4.0556=8.28%. Nearest option to the compounded 8.5% is 8.7%? Recheck: 8.54% lies between 8.4% and 8.7%; closest is 8.4%.
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