Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

Meera Exports invests ₹49,00,000 in 90-day commercial paper that will be redeemed at ₹50,00,000. Its alternative is a 90-day bank deposit giving 7.5% p.a. simple interest (365-day year). The CP has a rating below the deposit bank's, so the treasurer wants a yield premium. What is the CP's annualised yield (on the amount invested) and how does it compare with the deposit?

The CP yields about 8.28% a year, which is roughly 0.78% above the 7.5% deposit. The gain of ₹1,00,000 on ₹49,00,000 is 2.04% over 90 days, and scaling by 365/90 gives 8.28%, giving a modest premium for the extra credit risk.

  1. A8.28%, a premium of about 0.78% over the depositCorrect
  2. B8.28%, a premium of about 1.28% over the deposit
  3. C8.28%, a premium of about 0.78% below the deposit
  4. D8.16%, a premium of about 0.66% over the deposit

Explanation

Gain = ₹1,00,000 on ₹49,00,000 = 2.0408% for 90 days. Annualised = 2.0408% x 365/90 = 8.277%, about 8.28%. Premium over 7.5% = 0.78%. Using the face value base gives 8.11%, and the other options mis-state the premium or its direction.

Did you get it right without looking?

One question tells you little. A timed set on Management of Cash and Cash Equivalents shows your real accuracy, how long you take and where you lose marks.

Practise Management of Cash and Cash EquivalentsFree diagnostic mock

More Management of Cash and Cash Equivalents questions