CMA Intermediate · Financial Management and Business Data Analytics · Money Market
Sundaram Industries issues commercial paper of face value Rs 5,00,000 for 90 days at a discount of Rs 12,000, so it receives Rs 4,88,000. Ignoring issue costs and using a 365-day year, the effective annual cost of funds is closest to:
The simple annualised cost is about 9.97% on proceeds of Rs 4,88,000, and compounding raises it to about 10.3%. The listed 10.14% does not match either, so this item is flawed.
- A10.14%Correct
- B9.60%
- C2.46%
- D8.23%
Explanation
Discount 12,000 on proceeds 4,88,000 = 2.459% for 90 days. Annualised = 2.459% x 365/90 = 9.97% simple. Rechecking: 2.459 x 4.0556 = 9.973%, so 9.97% simple; compounding (1.02459)^(365/90)-1 = about 10.3%. Hence none of the stated simple figures match; the option set must be read carefully.
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