Question

10.  Jack has a friend, Mike, who recently sold his car to another friend, Sally. Sally agreed to pay Mike $10,750 in 9 months 4 months ago and signed a note to that effect. Unfortunately, Mike needs some cash now. Jack agrees to take the note off of Mike’s hands for $10,300. What annual simple interest rate will Jack earn when Sally pays him at the end of the time period?

Answer 1

Sally signed an agreement to pay Mike $10,750 in 9 months, the agreement was signed 4 months ago which means that from today 5 months is left for Sally to pay the obligation.

Unfortunately Mike requires cash now and Jack buys that note today and pays Mike $10,300

Mike will receive $10,750 in 9 months for $10,300 paid today.

Interest Earned = $10,750 - $10,300

= $450

Calculating the Annual Simple Interest Earned :-

Interest = (Note Buy amount)*(Simple Interest Rate)*(No of months/12)

where, No of months = 5 months

Note Buy amount = $10,300

$450 = $10,300*(Simple Interest Rate)*5/12

Simple Interest Rate = 10.49%

So, annual simple interest rate will Jack earn when Sally pays him at the end of the time period is 10.49%

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