Banker's Acceptance

CFA Level I
#1

Dear all,

Can someone explain to me how this question can be done?

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I read from Investopedia that banker’s acceptance (" BA") is usually quoted as a discount. So, in this question are we required to convert the discount yield to add-on yield? Any guidance will be much appreciated!

Thank you!

Cheers,

Ernest

#2

No, you are asked to estimate the cost of using this particular short term financing. Cost = Interest/ Net proceeds. All inclusive banker’s acceptance means that in these 2,000,000 the interest you own is included so Net proceed= Amount of the loan - Interest expense.

In numbers: Cost = { [5,25%/12*2,000,000] / [2,000,000-5,25%/12*2,000,000] } *12 = [8,750/ 1,991,250] *12 = 5,27%

#3

Thank you Gebura!

Is the formula stated in CFAI text ? Will it be possible if you provide me the reference page?

Thanks again!

#4

You are welcome.

The question is part of “Managing Short-Term Financing”, book 4, page 181.