Answer (D) is correct . By issuing commercial paper, the company will receive $100,000 and repay $110,000 every 6 months. Thus, for the use of $100,000 in funds, the company pays $10,000 in interest each 6-month period, or a total of $20,000 per year. The annual percentage rate can therefore be calculated as follows: Effective rate = Interest expense ¡Â Usable funds = $20,000 ¡Â $100,000 = 20.0%Answer (A) is incorrect because This percentage is the 6-month rate based on the face amount of the paper. Answer (B) is incorrect because The rate for 6 months is 10.0%. Answer (C) is incorrect because This percentage is based on the face amount of the commercial paper.
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