Ask Question
5 September, 07:50

What is the discount yield, bond equivalent yield, and effective annual return on a $2 million commercial paper issue that currently sells at 98.25 percent of its face value and is 128 days from maturity? (Use 360 days for discount yield and 365 days in a year for bond equivalent yield and effective annual return. Do not round intermediate calculations. Round your answers to 3 decimal places. (e. g., 32.161))

+2
Answers (1)
  1. 5 September, 07:57
    0
    1. Discount yield = 4.92%

    2. Dividend yield = 5.07%

    3. Effective annual return = 5.02%

    Explanation:

    The computation of discount yield, bond equivalent yield, and effective annual return is shown below:-

    Discount yield

    Commercial paper $2,000,000

    Current selling price $1,965,000

    ($2,000,000 * 98.25%)

    Days to maturity 128

    Discount yield (total days in a year) 360

    Dividend yield 4.92%

    ($2,000,000 - $1,965,000) : $2,000,000 * (360 : 128)

    = $35,000 : $2,000,000 * (2.8125)

    = 0.0175 * 2.8125

    = 0.04921

    = 4.92%

    Bond equivalent yield

    Commercial paper $2,000,000

    Current selling price $1,965,000

    ($2,000,000 * 98.25%)

    Days to maturity 128

    Discount yield (total days in a year) 360

    Bond equivalent yield 5.07%

    = ($2,000,000 - $1,965,000) : $1,965,000 * (365 : 128)

    = $35,000 : $1,965,000 * 2.8515625

    = 0.017811705 * 2.8515625

    = 0.05079119

    = 5.07%

    3. Effective annual return

    Bond equivalent yield 5.07%

    Effective annual return 5.02%

    = (1 + 5.07% : 365) ^365 - 1

    = 5.02%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “What is the discount yield, bond equivalent yield, and effective annual return on a $2 million commercial paper issue that currently sells ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers