Question

A one-year, $24,600, 12% note is signed on April 1. If the note is repaid on October 1 of the same year, how much interest expense is incurred? (Do not round intermediate calculations.)

$2,952

$1,476

$1,722

$1,230

The following 12%, $1,000 notes were issued on December 1. Which of the following is the correct method of calculation for the interest accrued as of December 31 of the same year on each of the notes described?

Interest on a 4-month note is calculated as: $1,000 × 12% × 1/12.

Interest on a 3-month note is calculated as: $1,000 × 12% × 1/3.

Interest on a 4-month note is calculated as: $1,000 × 12% × 1/4.

Interest on a 2-year note is calculated as: $1,000 × 12% × 1/24.

Answer 1

Following features of Notes Issuance are assumed in calculating interest expense involved:

1. Notes are medium term securities, issued at face value (not discounted securities) which carry either fixed or floating interest rates.

Here face value of the note is $24,600

2. The day count convention of short term and medium term securities are generally, 30/360 where all months are assumed to have 30 days.

Here the days between issue and redemption = April, 1 to October 1 = 183 days.= 6 months = 6 *30 = 180

Interest Expense = 24,600 * (Interest period as per 30/360) / 360 * interest rate = 24600*180/360*12% = $1476

So, the answer is b) 1476

Question b)

The interest rate is 12% p.a. and interest period time elapsed is one month as per 30/360 day count convetion as mentioned above.

This means day count fraction of 30/360 = 1/12

Hence, interest expense = 1000 * 12% * 1/12

Hence, answer a) is correct