Question

After being held for 40 days, a 120-day 12% interest bearing note receivable was discounted at a bank at 15%. What is the formula for the proceeds received from the bank?a.Maturity value less the discount at 12%b.Maturity value less the discount at 15%c.Face value less the discount at 12%d.Face value less the discount at 15%

Answer 1

Answer:

B) Maturity value less the discount at 15%

Explanation:

The money received after discounting the note will equal the maturity value, which includes the face value plus 12% interest receivable on the 120th date, minus the bank's fee, maturity amount x discount rate for 80 days.

For example, if the face value was $100, the maturity value = $100 + ($100 x 12% / 3) = $104. The bank's fee will = $104 x 15% x 80/360 =  $3.47

So the net proceeds = $104 - $3.47 = $100.53

Answer 2

The formula for the net proceeds is equal to maturity value minus the discount rate at 15%.

What do you mean by Maturity Value?

Maturity value is the amount due and paid by the financial liability holder as of the date of maturity of the liability.

The money received after discounting the note will equal the maturity value, which includes the face value plus 12% interest receivable on the 120th date, minus the bank's fee, maturity amount multiplied by the discount rate for 80 days.

For example, if the face value was $100,

the Maturity Value =   $\ 100 + ( 100 x \dfrac{12\%}{3}) = \ 104.$

The bank's fee will =  $\ 104 \times 15\% \times \dfrac{80}{360} = \ 3.47$

So the Net Proceeds =  $\ 104 - \ 3.47 = \ 100.53$

Hence, the net proceeds of the instruments will be $100.53.

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