CFA Practice Question

There are 120 practice questions for this study session.

CFA Practice Question

A company plans to issue $2,500,000 (face value) of commercial paper for one month. The company is quoted a rate of 5.88 percent with a dealer's commission of 1/8 percent and a backup line cost of 1/4 percent, both of which will be assessed on the face value. The effective cost of the financing is closest to ______.
A. 6.05%
B. 6.19%
C. 6.29%
Explanation: CP cost = [(interest + dealer's commissions + back-up costs) / net proceeds] x 12
Net proceeds = $2,500,000 - (0.0588 x $2,500,000 x 1/12) = $2,487,750
Interest + dealer's commissions + back-up costs = (0.0588 + 0.00125 + 0.0025) x $2,500,000 x 1/12 = 0.6255 x $2,500,000 x 1/12 = $13,031

CP cost = (13,031 / 2,487,750) x 12 = 6.29%

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