Jeremey Grey loans Gary Grobowski $550,000. Grey accepts a 4% note, which requir

Question

Jeremey Grey loans Gary Grobowski $550,000. Grey accepts a 4% note, which requires semiannual interest payments for 10 years. The day after receiving the 4th interest payment, Grey decides to sell the note to Dedham Savings Bank. Dedham Savings Bank agrees to purchase it to yield a 6% return. a. What is the amount that Jeremy Grey will receive on the sale of the note to Dedham Savings Bank? b. Prepare the entries that Jeremey Grey and Dedham Savings Bank will make on the day the note is sold to the bank. c) Please prepare the amortization schedule.

Explanation / Answer

Remaining years to maturity is 8 years as 4 semi annual payments are made.

Price of note will be:

Note will be purchased by the bank for 480914

Entry by Dedham saving bank:

Entry by Grey:

Amortisation schedule for bank:

Interest amount: Face value 5,50,000 Coupon/stated Rate of interest 4.00% Frequency of payment(in months) 6 Interest amount 550000*0.04*6/12=                11,000 Present value calculation: yield to maturity/Effective rate 6.00% Effective interest per period(i) 0.06*6/12= 0.03 Number of interest payments (n): Years to redemption 8 Interest payments per year 2 Total interest payments(n) 16 Cash flow Discount factor Discounted cash flow Interest payments-Annuity (3%,16 periods) 11,000 12.5611 1,38,172 Principle payments -Present value (3%,16 periods) 5,50,000 0.6232 3,42,742 Note recording amount 4,80,914

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