19 You are considering the following two investments 120day

19 You are considering the following two investments. 120-day Commercial Paper with a face value of $1M, selling at $985,000 or a 90-day Jumbo CD with a face value of $1M selling at $990,000. Find the BEYs of each investment, which investment should you choose? Select one: a. The Commercial Paper b. It is impossible to determine c. The Jumbo CD d. The choices are identical

Solution

BEY =( Face value - Purchase Price)/(Purchase price) * 365/days

BEY of Commercial Paper = ( 1,000,000 - 985,000)/(985,000) * 365/120 = 4.63%
BEY of JUMBO CD = ( 1,000,000 - 990,000)/(990,000) * 365/90 = 4.097%

The invesment to be chosen is option a ) Commercial Paper

Best of Luck. God Bless