Reading 40 - Question 7 confusion

Hi all - reading 40, question 7 (volume 4 page 175) says William Jones is evaluating three possible means of borrowing $1 million for one month

-Drawing down on a line of credit at 7.2 percent with 1/2% commitment fee on full maount with no compensating balances

-A banker’s acceptable at 7.1%, all inclusive rate

-Commercial paper at 6.9% with dealer’s commission of 1/4% and backup line cost of 1/3%, assessed on the $1million commercial paper issued

The banker’s acceptable is cheapest and I agree but I’m confused on how the cost of credit was calculated. The line of credit was calculated as the interest plus the commitment fee (7.7%) but the banker’s acceptance and commercial paper were both calculated as monthly interest divided by the $1mil minus one month interest, all times 12. My confusion is in the denominator. Why are the “net proceeds” considered to be less than the $1mil borrowed?


A banker’s acceptance is a discount instrument: the lender collects interest up front, instead of waiting until the end of the agreement.

All inclusive. The net proceeds include interest payment.

See the volume 4 p 171.