Question

Mike Kornas signed a 12-month, 9% p.a. simple interest promissory note for $9,725 with MacDonald’s Furniture. After 85 days, MacDonald’s Furniture sold the note to the Royal Bank at a rate of 11%, then Royal Bank resold the note to Friendly Finance Company 42 days later at a rate of 6.25%. Find the gain or loss on this note for each company and bank involved, as well as a rate of return realized

Answer 1

Mike Komas signed -12 month 9% p.a. simple interest promissory note of $9725 to McDonald's Furniture.

1.Mike komas have to pay interest for 12 month on promissory note. So the interset is the cost or loss for mike komas.

Loss for Mike Komas for 12 months = 9725 * 9% * ( 12 months +3 days of grace )

= 9725 * 9% * [ considering 365 days in 12 month+ 3 days grace]

= $ 875.25

2. After 85 days McDonald Furniture sold promissory note to Royal Bank at the rate of 11%. The interest is gain for the mcdonald furniture.

Interest of McDonald furniture for holding note of 85 days = 9725 * 9% * ( 85 days/ 365 days )

= $ 203.8

Interest paid on note to Royal bank when sold ( 11% -9%) = 9725 * 2% *(280/365) [ 365days - 85days=280 day]

= $ 149.2

NET GAIN FOR McDonald Furniture = 203.8 - 149.2 = $ 54.6

Rate of return realised = 54.6 / 9725 = 0.56 %

3. After 42 days the Royal bank resold the note to Friendly Finance company at the rate 6.25 %. Because of royal bank sold the note on interest less than paid to royal bank so it is also a gain for royal bank.

The interest for Royal Bank for holding note for 42 days at the rate 11% = 9725 * 11% *(42 / 365 )

= $ 123

The gain on solding of note to Friendly Finance ( 11% - 6.25% ) = 9725 * 4.75% * (238 / 365)

[365 - 85 - 42 = 238 days ]

=$ 301.2

NET GAIN FOR Royal Bank = 123 + 301.2 = $ 424.2

Net rate of return realised = 424 / 9725 = 4.35%

4. Gain for friendly finance to hold note for the rest period = 9725 * 6.25% *(238 / 365 )

= $ 396.3

Rate of return realised = 396 / 9725 = 4.07%

Note : 3 days grace period is the period given to the payer for the payment of amount with interest when the note is due . It is added to the due date.