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25 January, 07:23

Magna Corporation has an issue of commercial paper with a face value of $ 1 comma 000 comma 000 and a maturity of six months. Magna received net proceeds of $ 973 comma 710 when it sold the paper. What is the effective annual rate (EAR ) of the paper to Magna?

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  1. 25 January, 09:02
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    The effective annual rate (EAR ) of the paper to Magna is 5.47%

    Explanation:

    interest rate = [1000000 - 973710]/[973710]

    = 2.7%

    EAR = (1 + interest rate) ^2 - 1

    = (1 + 2.7%) ^2 - 1

    = 5.47%

    Therefore, The effective annual rate (EAR ) of the paper to Magna is 5.47%
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