Question

Piscataway sells discount notes with a face value of $2,000 and proceeds of $1,700. The term of each note is 5 years. (You should be able to confirm that the simple discount rate is 3%).

a. If Piscataway must raise $800,000, how many of these notes must it sell?

b. This problem could be viewed as a simple interest transaction rather than a simple discount transaction. What is the simple interest rate corresponding to the values in this scenario?

Answer 1

a. If Piscataway must raise $800,000, how many of these notes must it sell?

# of notes to raise $800000 = Amount required / Issue price

# of notes to raise $800000 = 800000 / 1700

# of notes to raise $800000 = 471 Notes (Rounded from 470.59 Notes)

b. This problem could be viewed as a simple interest transaction rather than a simple discount transaction. What is the simple interest rate corresponding to the values in this scenario?

Simple Interest rate = Interest per year * 1 / Issue price

Simple Interest rate = (300 / 5) * 1 / 1700

Simple Interest rate = 3.53%

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