Q. How to calculate your Commercial Paper Investment Returns

Stage 1

Under current terms (interest rate & 182-day tenor), investor puts N5m to work. However, this represents Face value "FV" (A) to be received at maturity.

Interest works out to -N514k (B) which if taken upfront, means the actual/real amount invested is the Discounted Value "DV" (C); C=A-B.

But that interest is not tax exempt, so Withholding Tax ''WHT" of 10% applies (D); D=10% *B.

Broker earns Custody Fee (E), a token for safe keeping assets on behalf of the investor.

Ultimately, Total Consideration "TC", i.e amount payable by the investor at the point of booking the CP, (F) is the sum of DV, WHT & CF; F= C + D + E!

Net Interest income (G) is therefore FV less TC; G=A-F or G=B-D-E.

True Yield (H) is the actual % return on the investment, derived by the ratio of interest to discounted value, which is then annualized; H = B / c * (365 / 182).

Rate is always lower than Yield as the former measures the return compared to the FV while the latter rightfully measures this against the DV.

As we can see from the above, the N5m becomes the FV of the CP, when interest (B) is taken upfront. Now, if the investor chooses the option, he receives a low interest amount (G), as taxes (D) and Custody Fee (E) are deducted from the gross interest income.

Stage 2

Now, some investors would rather prefer to reinvest that net interest (G), alongside the total consideration (F), to improve the return in absolute terms (simply put, get a higher amount of net interest upon maturity).

Under this scenario, a little bit of mathematical gymnastics (reverse calculation) is done to derive what the FV would be, If the new DV (X) is N5m; X= F + G.

Using MS Excel, we determine that the new FV (W) needed to arrive at a N5m DV is circa N5.48m

You would notice that whilst all the figures (B-G) have changed, True Yield (H & I) remains unchanged.

So, the transition from upfront interest to reinvesting interest is explained between stages 1 and 2. 

Stage 3

This second and final transition are only required to ensure compliance with the regulatory requirement to round up/approximate FV to the nearest thousands.

Again, we make use of goal-seek in MS Excel to make the very minute adjustment to DV, after having adjusted the FV as appropriate.

Net interest (G) is up c.96% from ~N436 to ~N480. 

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