Question

Peter buys an item from Sue and signs a note to pay $405 in 10 months. Then, 2 months before the note comes due, Sue sells the note to a bank which discounts the note based on 12.5% simple interest. How much did the bank pay Sue for the note?

pls show work

Answer 1

On the eighth month, Sue is having note worth $405

Since, she sells the note to bank 2 months prior to the due date, the proceeds she will receive after applying the discount. Such that the bank will receive $405 from Peter on the 10th month.

We will multiply $405 with a discounting factor.

Discounting Factor (DF) = 1/(1+r), where r is adjusted for the period. In this case it is 2 months.

Hence, r = (12.5/12)x 2 = 2.0833%

Sue will receive the following amount :

405 x 1/(1.02083) = 396.74

Answer : The bank paid $396.74 to Sue for the note

Cross Check :

Discount = 396.74 x 12.5% x 2/12 = 8.26

396.74 + 8.26 = 405

answered by: anonymous