Question

1- Hafers, an electrical supply company, sold $5,000 of equipment to Jim Coates Wiring, Inc. Coates signed a promissory note May 12 with 4.8% interest. The due date was August 10. Short of funds, Hafers contacted Charter One Bank on July 20; the bank agreed to take over the note at a 6.5% discount. (Use Days in a year table.)

What proceeds will Hafers receive? (Use 360 days a year. Do not round intermediate calculations. Round your final answer to the nearest cent.)

Proceeds received

2- The Treasury Department auctioned $28 billion in 3-month bills in denominations of $10,000 at a discount rate of 5.550%.

What would be the effective rate of interest? (Use calendar year. Do not round intermediate calculations. Round your answer to the nearest hundredth percent.)

Effective rate of interest         

Answer 1

Question-1

Hafers will receive net proceeds of $5,041.04 or $5,041 from the note.

Number of days from May 12 to May 31st = 19 days

Number of days in June=30 days

Number of days in July = 31 days

Number of days in August = 10 days

Total number of days between May 12 to August 10=19+30+31+10=90 days

Interest on promissory note:-

(5000 x 90/360days x 4.8/100) =$60

Total Amount due on the promissory note = Face Value of the note + Interest on promissory note:-

$5,000+$60=$5060

Number of days between July 20 and August 10 =21 days

Number of days in the year is 360 days

Discount rate is 6.5%

Discount=($5,000 x 21/360 x 6.5/100)=$18.96

Net proceeds=Amount due - Discount on promissory note

$5060 - $18.96=$5,041.04

Hafers will receive net proceeds of $5,041.04 or $5,041 from the note.

Question-2

Effective rate of interest would be 5.58%

Denomination amount=$10,000

Discount rate 5.550%=0.055

Interest on the denomination amount = $10,000 x .055 x 3/12 months = $137.50

Net proceeds after discount= $10,000 – $137.50 = $9,862.50

Effective rate of interest rate =($137.50 / $9,862.50) x (12/3 months)=0.05577=5.58%