Question

On June 1, 2018, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $560,000 and a discount rate of 5%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2018?

Answer 1

PV 550,506.64

Step-by-step explanation:

`Nominal * (1 - \: discount \: rate)^(time) = \: Present \: Value`

`560,000 * \: (1-0.05)^(4/12) = PV`

PV = 550,506.64

We can convert the discount rate to interest rate and reach the same value:

`i= (d)/(1-d) = 0.05/0.95 = 0.052631578`

`(Nominal)/((1+rate)^(time)) = PV`

`(560,000)/((1+0.052631578)^(1/3)) = PV`

PV = 550,506.64