Criss-Cross Manufacturers will issue commercial paper for a short-term cash inflow. Criss-Cross must raise $5 comma 900 comma 000 , and the paper will have a maturity of 182 days. If this paper has a maturity value of $50 comma 000 and is selling at an annual interest rate of 8.5 % , what are the proceeds from each paper; that is, what is the discount rate on the commercial paper?

The correct answer for discount rate is 95.75% and paper required is 123.24.

Explanation:

According to the scenario, the given data are as follows:

Amount to raise = $5,900,000

Maturity time = 182 days

Maturity value = $50,000

Interest rate annual = 8.5%

So, interest rate for maturity time = 8.5% : 2 = 4.25%

So, Discount rate = 100% - 4.25%

= 95.75%

So, selling price of each paper = Maturity value * Discount rate

= $50,000 * 95.75%

= $47,875

So, number of paper required to raise the amount required are as follows:

Number of paper required = Amount to raise : selling price of each paper

= $5,900,000 : $47,875

= 123.24 papers