6. Juan-Solez, a prominent painter, takes out a simple discount note for one yea
ID: 2781898 • Letter: 6
Question
6. Juan-Solez, a prominent painter, takes out a simple discount note for one year from River National Bank for $5,000. The annual rate of interest is 8%, what is the amount of: A. Bank discount B. Proceeds C. Effective rate of interest (to nearest tenth percent) Mobilee Oil Company accepted a $10,000, 120-day note dated March 3 at 8%% to sette a past-due account receivable. Mobilee Oil discounted the note to raise cash on May 10, at a discounted rate of 9%. What proceeds did Mobilee Oil receive? 7,Explanation / Answer
6) In case of a discounted note (lets say of $100), bank deducts its Interest (@10%, $10) immediately and pays you the remaining amount ($90) and you only pay the principal amount ($100) on maturity. Whereas in case of a non-discounted note, bank would give you the full amount ($100) and you pay the principal along with interest later on ($110).
Therefore, in our case -
A. Bank Discount = $5000 x 8% = $400
B. Proceeds = $5000 - $400 = $4600 (As bank would deduct amount immediately)
C. Now, if this was a non-discounted note you are paying interest $400 and receiving full $5000. So, Effective interest would be 8% (400 / 5000). But, in case of a discounted note you are receiving only $4600 for use. Therefore, Effective Interest would be -
Effective Interest Rate = $400/ $4600 * 100 = 8.695652173% or 8.70%(rounded off)
7) I am assuming 360 days in a year -
Interest to be received on the note = $10000 x 8.5% x 120/360 = $283
Maturity Value of note = Principal + interest = $10,000 + $283 = $10,283
Maturity Date / due date = March 3 + 120 days = July 1
Now, the company discounts the note on May 10. Therefore, the discount period is May 10 to July 1, i.e., 52 days (July 1 is the due date, so no interest on this date).
Discount Amount = Maturity value x Discount rate x Discount Period = $10,283 x 9% x 52/ 360 = $134
Net proceeds received by the company = $10,283 - $134 = $10,149
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