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21 December, 09:56

What is the discount yield, bond equivalent yield, and effective annual return on a $4 million commercial paper issue that currently sells at 97.50 percent of its face value and is 145 days from maturity?

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  1. 21 December, 10:17
    0
    6.21%

    Explanation:

    Discount of the bond can be calculated by subtracting the purchase price of the bond from the face value. Discount Yield is the ratio of discount on the bond to the future value of the bond.

    Discount Yield = [ (F - P) / F] x [360/t]

    Where

    F = Face Value = $1,000 (assumed)

    P = Present value = $1,000 x 97.5% = $975

    t = 145 days

    Placing the value in the formula

    Discount Yield = [ ($1,000 - $975) / $1,000] x [360/145] = 0.0621 = 6.21%
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