The time from acceptance to maturity on a 300000 bankers acc

The time from acceptance to maturity on a $300,000 banker\'s acceptance is 30 days. The importing bank\'s acceptance commission is 3 percent and the market rate for 30-day B/As is 4 percent.

Determine the bond equivalent yield the importer\'s bank will earn from discounting the B/A with the exporter.

Solution

If the exporter holds the B/A to maturity he will receive:

$300,000 * ( 1 - ( 0.03 * 30/360)) = $292,500

If the exporter discounts the B/A with the importer bank he will receive:

$300,000 * ( 1 - (0.03 + 0.04)*30/360) = $298,250

The bond equivalent yield that the exporter pays in discounting the B/A is

($298,250 / $292500) * 365/30 = 0.1241