Question

Currently Mr. Brommer holds a 90 promissory note for $10,000 dated March 15th which earns 4% exact simple interest. Prior to the note’s maturity, he sells the note to another person on April 3rd who agrees to a discount rate of 9.5%.

_____________________ a.) How long is the discount period?

_____________________ b.) How much is the discount amount?

_____________________ c.) What are the proceeds of the transaction?

Answer 1

(A) – Discount Period = 71 Days

(B) – Discount Amount= $189.23

(C) - Proceeds of the transaction = $ 9,910.77

Calculations

Interest on Note = $10,000 x 4% x [90/360] = $100

Maturity Value = Principal Amount + Interest

= $10,000 + 100

= $10,100

Discount Period

Days between March 15^th and April 3^rd = 19 Days

Discount Period = 90 Days – 19 Days = 71 Days

Discount = $10,100 x 9.50% x [71/360] = $189.23

Proceeds = Maturity Value – Discount amount

= $10,100 - 189.23

= $ 9,910.77