Answer :
The bond equivalent yield is a measure of the annualized yield of a bond that allows for the comparison of yields on bonds with different maturities. The bond equivalent yield on the $8 million commercial paper issue is 3.91% (option a).
To calculate the bond equivalent yield, we need to use the formula:
BEY = (Discount / (Face Value - Discount)) * (365 / TTM)
where:
- Discount is the difference between the face value and the price at which the commercial paper is currently selling.
- Face Value is the value at maturity, which is $8 million in this case.
- TTM (Time to Maturity) is the number of days remaining until the commercial paper matures, which is 142 days in this case.
- 365 is the number of days in a year.
First, let's calculate the Discount:
Discount = Face Value - (Price at which it is selling * Face Value)
Discount = $8,000,000 - (0.985 * $8,000,000)
Discount = $8,000,000 - $7,880,000
Discount = $120,000
Next, let's calculate the Bond Equivalent Yield (BEY):
BEY = (Discount / (Face Value - Discount)) * (365 / TTM)
BEY = ($120,000 / ($8,000,000 - $120,000)) * (365 / 142)
BEY = ($120,000 / $7,880,000) * (365 / 142)
BEY = 0.0152 * 2.5704
BEY = 0.0391
Therefore, the correct answer is:
a. 3.914%
To know more about bond equivalent yield:
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