Question

On May 15, Maynard Co, borrowed cash from Texas Bank by issuing a 30-day note with a face amount of $88,800. Assume a 360-day Required: a. Determine the proceeds of the note, assuming the note carries an interest rate of 7%. 63,600 X b. Determine the proceeds of the note, assuming the note is discounted at 7%. 63,229 X

Answer 1

(a) when note carries interest rate of 7%, Maynard company will receive full amount which is Face value of note irrespective of rate of interest, at the time of signing the note .

At maturity must repay FV + Accrued interest for 30 days

Hence proceeds of note = $88,800

(b) when note is discounted Maynard company. will receive an amount of discounted FV at today's worth but for 30 days effectively

Nominal annual interest rate = 7%

Total no of days in year. 360 days

Maturity days 30days

Nominal interest rate for 30 days = 7%/360*30 =0.5833%

face value = $88,800

Proceeds of note = 88,800/(1+0.5833) =$88,285.03