A corporation issues $10 million in commercial paper at a discount with a 90-day maturity. The paper is sold at 98.5% of face value. What is the approximate annualized yield?

Why C — 6.09%

The discount is 1.5% for 90 days. To annualize: (1.5% / 98.5%) x (360 / 90) = 1.523% x 4 = approximately 6.09%. Money market instruments use a 360-day year convention. The actual dollar discount is $150,000 on a $10 million face value, and the investor earns this over 90 days. Commercial paper yields are quoted on a discount basis similar to T-bills.