ACCA Financial Management (F9) Certification Practice Exam

What is the formula to calculate yield on commercial paper?

1. (Number of days in year/Days Held) x (Selling price - Purchase price/Purchase Price)

2. (Days Held/Number of days in year) x (Selling price - Purchase price)

3. (Selling price - Purchase price) x (Days Held/Number of days in year)

4. (Days Held/Number of days in year) x (Purchase Price/Selling price)

The correct answer is: (Number of days in year/Days Held) x (Selling price - Purchase price/Purchase Price)

The formula for calculating the yield on commercial paper focuses on the return an investor receives relative to the amount of money initially invested, adjusted for the duration of the investment period. The correct formula indeed expresses yield as the annualized return based on the difference between the selling price and the purchase price, normalized by the length of time the commercial paper is held. Specifically, the formula is structured as follows: Yield = (Number of days in year / Days Held) x ((Selling price - Purchase price) / Purchase Price) This ensures that the yield is expressed on an annualized basis, allowing for comparisons irrespective of the actual duration of the investment. The numerator captures the rate of return, which is the price appreciation (Selling price minus Purchase price), and the denominator accounts for the initial investment (Purchase Price). By multiplying by the annualization factor (Number of days in year divided by Days Held), it credits the yield with the appropriate timeframe to make it relevant for annual performance. In contrast, alternatives that suggest different forms—such as multiplying the yield by the purchase price or not properly annualizing the return—do not represent the yield appropriately. Therefore, understanding this formula helps in accurately assessing the profitability of investments in short-term securities like commercial paper.