What exactly the logic for calculating these two costs ? Book says, Cost = interest+commision/ net proceeds But, for commercial paper cost it says, cost = interest+commision+backupcost/face amount-interest But, net proceeds should be = face amount-interest-commission-backup cost ??? Also, commission is multiplies by 1/12–> this means commissions and backup costs are also given in annualized terms ? However, for banker acceptances, a rate called all inclusive is given (which includes commission). And for the denominator the entire “all inclusive rate” is subtracted from face value to come to net proceeds. Can someone please help me understand this discrepancy !!!
is this covered on the test? I haven’t seen this in any of the LOS’s…
check corporate finance, this is an addition from december 2007 to June 2008
This is in corporate finance… very small section on short term financing options. I’ve never seen a question on it that involved a calculation. I’ve only seen one that asked in CP and BAs were liquid or illiquid (they’re illiquid)
Generally, for each instrument, the formula is interest paid/net proceeds * number of periods within the year. Be carefull, if you borrow for 3 months, there are 4 periods during the year (4 periods of 3 months each).