cfa mock afternoon question 75 cfa, commercial, commission, afternoon

prav_Cfa7

A company plans to issue $2,500,000 (face value) of commercial paper for one month. The company is quoted a rate of 5.88 percent with a dealer’s commission of 1/8 percent and a backup line cost of 1/4 percent, both of wiich will be assessd on the face value. the effective cost of the financing is closet to:
6.03%
6.16%
6.29%
the answer is C,
Can anybody explain to me how this work?
thanks

dontknow1987

don’t have calculator, or answers in front of me but if you add .00125 plus .0025 to quoted rate you get pretty close to the answer

chetan86

thanks, now that’s what I call shotcut!

siavosh

Yeah, honestly that’s what I did on the mock too.
I thought the answer would be arrived at by converting it to a HPY then to a EAY or BEY, but nope….

dece2011

The actual calc for this one was quite long. But the formula is in the book