Question

A note for $800 is due in 90 days with simple interest at 6%. On the maturity date, the maker of the note paid the interest in full and gave a second note for 60 days without interest and for such an amount that when it was discounted at a 7% simple discount rate on the day it was signed, the proceeds were just sufficient to pay the debt. Determine the interest paid on the first note and the face value of the second note.

Answer 1

I) Interest paid = Par value of bond * Interest rate * Maturity days / 360 days

Here,

Par value = $800

Interest rate = 6%

Maturity days = 90 days

Now,

Interest paid = $800 * 6% * 90/360 days

Interest paid = $12

Note : 360 days in a year is assumed.

II) Face value of second note = Value of 1st note / (1 - Discount rate)

Here,

Value of 1st note = $800

Discount rate = 7% or 0.07

Now,

Face value of second note = $800 / (1 - 0.07)

Face value of second note = $800 / 0.93

Face value of second note = $860