?Athree-month (90-day) piece of commercial paper is purchased for $97,500. What are the simple and compounded yields on this investment? What is the cost to the firm issuing the paper?
What will be an ideal response?
The simple (non-compound) yield: i = ($2,500/$97,500) x (12/3) = 10.26%.?The compound yield: i = ($100,000/$97,500)365/90 - 1 = 10.81%.?The return on the investment is also the interest rate or cost that the borrower pays for the use of the funds.
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