Question

Bob signs a note promising to pay Marie $3375 in 3 years at 11% compounded monthly. Then, 51 days before the note is due, Marie sells the note to a bank which discounts the note based on a bank discount rate of 19.5%. How much did the bank pay Marie for the note?

Answer 1

Maturity value of the note= P(1+r/t)^nt

Where P= Principal (given as $3.375)

r= interest rate (given as 11%)

n= period in number of years (given as 3) and

t= number of times compounded a year (given as 12)

Therefore,

Maturity value= 3375*(1+0.11/12)^(3*12)

= 3375* 1.009166667^36

=3375*1.388878629 = $4.687.47

Also given, discount rate of bank= 19.5%

Number of days till due= 51

Discount as per Bank Discount Rate= 4687.47*19.5%*51/360 = $129.49

Amount paid by the bank= Maturity value- Discount

=4687.47-129.49 = $4,557.98