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22 October, 15:16

Freeman corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. freeman expects to sell the commercial paper for $2,980,000. what is freeman's annualized cost of borrowing?

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  1. 22 October, 15:35
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    The annualized cost of borrowing is 5.42%

    Explanation:

    The cost of borrowing is the finance charge which is the dollar amount of the loan that cost the person. Lenders usually charge what is referred to as the simple interest.

    The formula to compute the same is as:

    Principal x rate x time = Interest

    where

    Principal amount is $3,000,000

    Rate is not known

    Time is 45 days, So time is number of days borrowed divided by number of days in a year

    Time = 45 / 365 days

    Time = 0.123

    Interest = Par value - Selling Value

    Interest = $3,000,000 - $2,980,000

    Interest = $20,000

    Putting the value above:

    Rate = Interest / Principal x Time

    Rate = $20,000 / $3,000,000 x 0.123

    Rate = $20,000 / $369,000

    Rate = 5.42%
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