CMA Intermediate · Financial Management and Business Data Analytics · Money Market
Meridian Textiles Ltd issues 90-day commercial paper with a face value of ₹1,00,00,000 at a discount, so that the investor earns a simple annualised yield of 8% on the amount invested (365-day year). Which of the following is the issue price closest to the correct value?
Because the investor's yield is calculated on the amount invested, the price is face value divided by (1 + 0.08 x 90/365), which is about ₹98.06 lakh. The nearest option is ₹98,04,000, since discounting on face value or using a full year would give different figures.
- A₹98,04,000 approximatelyCorrect
- B₹98,00,000
- C₹98,40,000 approximately
- D₹92,00,000
Explanation
Price = Face value / (1 + r x t/365) = 1,00,00,000 / (1 + 0.08 x 90/365) = 1,00,00,000 / 1.019726 = about ₹98,06,000. Checking: 98,06,000 x 0.019726 = about 1,93,000, which gives ₹1,00,00,000. Using 8% discount on face value (₹98,03,000 at 98.03 approx) or ignoring the time fraction gives wrong values; the nearest option is ₹98,04,000 approximately. The 92,00,000 option deducts a full year's 8%.
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