Calculate the annualized rate of return on a 200-day commercial paper. This loan does not pay periodic interest; it is a discount security. The face value of the paper is $1 million and the current market value is $980,000.
Duncombe village golf course is considering the purchase of new equipment that will cost $1,200,000 if purchase today and will generate the following cash disbursements and receipts. should Duncombe pursue the investment if the cost of capital is 8 percent? Why? Please label your calculations. Thanks, Ann.
To calculate the annualized rate of return on a discount security like commercial paper, we can use the following formula:
Annualized Rate of Return = [(Face Value - Current Market Value) / Face Value] * (365 / Number of Days)
In this case, the face value of the commercial paper is $1,000,000 and the current market value is $980,000. The number of days is 200.
Let's calculate the annualized rate of return step-by-step:
Step 1: Calculate the difference between the face value and the current market value:
Face Value - Current Market Value = $1,000,000 - $980,000 = $20,000
Step 2: Calculate the fraction of the initial investment:
Fraction of Initial Investment = (Face Value - Current Market Value) / Face Value = $20,000 / $1,000,000 ≈ 0.02
Step 3: Calculate the annualized rate of return:
Annualized Rate of Return = Fraction of Initial Investment * (365 / Number of Days) = 0.02 * (365 / 200) ≈ 0.0365
Step 4: Convert the decimal rate to a percentage:
Annualized Rate of Return ≈ 0.0365 * 100 ≈ 3.65%
Therefore, the annualized rate of return on a 200-day commercial paper is approximately 3.65%.
To calculate the annualized rate of return on a discount security like a commercial paper, you can use the following formula:
Annualized Rate of Return = (Face Value - Current Market Value) / Face Value * (365 / Number of Days)
In this case, the face value of the commercial paper is $1 million and the current market value is $980,000. The number of days is 200 as mentioned.
Let's plug the values into the formula:
Annualized Rate of Return = ($1,000,000 - $980,000) / $1,000,000 * (365 / 200)
Simplifying the formula:
Annualized Rate of Return = $20,000 / $1,000,000 * 1.825
Calculating the result:
Annualized Rate of Return ≈ 0.0365 or 3.65%
Therefore, the annualized rate of return on the 200-day commercial paper is approximately 3.65%.