Chapter 16, Problem 16.15P

Cost of commercial paper Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of $1 million. The firm has received initial proceeds of $978,000. (Note: Assume a 365- day year.)

1. a. What effective annual rate will the firm pay for financing with commercial paper, assuming it is rolled over every 90 days throughout the year?
2. b. If a brokerage fee of $9,612 was paid from the initial proceeds to an investment banker for selling the issue, what effective annual rate will the firm pay, assuming the paper is rolled over every 90 days throughout the year?