Answer:
1. Discount yield = 4.92%
2. Dividend yield = 5.07%
3. Effective annual return = 5.02%
Explanation:
The computation of discount yield, bond equivalent yield, and effective annual return is shown below:-
Discount yield
Commercial paper $2,000,000
Current selling price $1,965,000
($2,000,000 × 98.25%)
Days to maturity 128
Discount yield ( total days in a year)360
Dividend yield 4.92%
($2,000,000 - $1,965,000
) ÷ $2,000,000 × (360 ÷ 128)
= $35,000 ÷ $2,000,000 × (2.8125)
= 0.0175 × 2.8125
= 0.04921
= 4.92%
Bond equivalent yield
Commercial paper $2,000,000
Current selling price $1,965,000
($2,000,000 × 98.25%)
Days to maturity 128
Discount yield ( total days in a year)360
Bond equivalent yield 5.07%
= ($2,000,000 - $1,965,000
) ÷ $1,965,000 × (365 ÷ 128)
= $35,000 ÷ $1,965,000 × 2.8515625
= 0.017811705 × 2.8515625
= 0.05079119
= 5.07%
3. Effective annual return
Bond equivalent yield 5.07%
Effective annual return 5.02%
= (1 + 5.07% ÷ 365)^365 -1
= 5.02%
