Question

1) A 7%, 60-day note is discounted 15 days before the maturity date. If the discount rate is 5.5% and the proceeds received are RM997.77, find:

a) The amount of discount charged.

b) The discount date, if the maturity date of the note is 26 October 2018.

c) The face value of the note.

2) A 6%, 110-day note dated 31 August 2018 has a maturity value of RM4,073.33. On 12 October 2018, the note is discounted and the proceeds received are RM4,019.47. Find:

a) The face value of the note.

b) The bank discount rate that is charged when the note is discounted.

Answer 1

Answer: 1: A 7%, 60-day note is discounted 15 days before the maturity date. If the discount rate is 5.5% and the proceeds received are RM 997.77

Maturity Value = 997.77

Rate of Discount= 5.5%

Time = 60 days

Rate of Interest = 7%

MATURITY VALUE= PRINCIPAL(1+ RATE* TIME)

Principal = Maturity Value / (1+ RATE* TIME)

= 997.77/ (1+.055* 45/360)

= 997.77/ (1+.006875)

= 997.77/ 1.006875

= 990.9571

Answer: a) The amount of discount charged = 997.77- 990.95 = 6.82

b) The discount date, if the maturity date of the note is 26 October 2018.

Discount date = Maturity Date - Discount Days before Maturity

= 26 Oct 2018 - 15 days

= 11 Oct 2018 ( If We did not consider 3 days as Grace)

c) The face value of the note.

Maturity Value = 997.77

MATURITY VALUE= PRINCIPAL(1+ RATE* TIME)

Principal = Maturity Value / (1+ RATE* TIME)

= 997.77/ (1+.07* 45/360)

= 997.77/ (1+.00875)

= 997.77/ 1.00875

= 989.11

Hence Face Value is = 989.11

Answer: 2:

A 6%, 110-day note dated 31 August 2018 has a maturity value of RM4,073.33. On 12 October 2018, the note is discounted and the proceeds received are RM4,019.47. Find:

a) The face value of the note.

MATURITY VALUE= PRINCIPAL(1+ RATE* TIME)

Principal or Face Value = Maturity Value / (1+ RATE* TIME)

= 4073.33 / (1+0.06 * 110/360)

  = 4073.33 / 1.0183

= 4000.12 or 4000

b) The bank discount rate that is charged when the note is discounted.

Date of The bill = 31 August 2018

Discounted Date = 12 October 2018

Duration of Time = from 31 August 2018 to 12 October 2018 = 42 days

Maturity Value of Bill for 42 days = Face value( 1 + Rate *Time)

= 4000 (1+0.06 * 42/360)

= 4000 * 1.007

= 4028

After Discount Maturity Value Realized = 4,019.47

Discount Amount = 4028 - 4019.47 = 8.53

Discount Rate = (8.53/ 4028) 100 = 2.11%