 Business
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))

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Answers (1)
1. 5 September, 07:57
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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%
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