Question

In: Finance

(i) Find the proceeds when the following note is discounted: Face Value Date Term

(i) Find the proceeds when the following note is discounted:

Face Value Date Term Interest rate Date of discount Discount rate

$5000 Apr.21 3 months 16% June 11 16%

ii. Find the rate of interest earned by the purchaser if he holds the note until maturity.

(i) Find the proceeds when the following note is discounted:

Face Value Date Term Interest rate Date of discount Discount rate

$5000 Apr.21 3 months 16% June 11 16%

ii. Find the rate of interest earned by the purchaser if he holds the note until maturity.

Expert Solution

(i) Interest earned = Face Value * Interest rate

= $5000 * 0.16/4 = $200

Maturity Value = Face Value + Interest earned

= $5000 + $200 = $5200

Due Date is 21 April + 3 months = 21 July

Discount period = Days between 21 July and 11 June

= 40 Days

Bank Discount = Maturity Value * Discount Rate * Discount period

= $5200 * 0.16 * 40/365 (Considering 365 days in a year)

= $91.178

Period = Maturity Value - Bank Discount

= $5200 -$91.178

= $5108.822

(ii) Rate of interest earned = (Maturity Value _ Face Value) / Face Value

= (5200 - 5000) / 5000

= 200/5000

= 4%

jeff jeffy answered 2 years ago

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