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Able Co. accepted a $20,000 note on March 10 with terms of 6%, 60 days. Able...

Able Co. accepted a $20,000 note on March 10 with terms of 6%, 60 days. Able Co. discounted the note on March 20, at the Green Bank at 7%. Use ordinary interest. What net proceeds did Able receive?

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Answer #1

Assuming 360 days in a year.

Maturity value of the note = Principal + Interest

Principal = $20000

Interest = $20000 * 6% * 60 / 360 = $200

Maturity value = $20000 + $200 = $20200

Now, on March 20, Able Co. discounts the note with the bank at 7%. So note was discounted 50 days before the maturity date. Bank discount amount will be:

Bank discount = Maturity value * Bank discount rate * No. of days remaining to maturity / Total no. of days

Bank discount = $20200 * 7% * 50 / 360 = $196.39

Net proceeds = $20200 - $196.39 = $20003.61

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