Question

For services rendered, an attorney accepts a 90-day note for $5,000 at 9% simple interest from a client(Both interest and principal are repaid at money sooner, the attorney sells the note to a third party for $ 5,070 after 60 days What annual interest rate will the third party receive for the investment?

Answer 1

Explanation:

The original 90-day note has a principal of $5,000 and a simple interest rate of 9% per year.

Using the simple interest formula:

Interest = Principal x Rate x Time

where Time is measured in years, we can find the amount of interest that will accrue over the 90-day period:

Interest = $5,000 x 0.09 x (90/365) = $110.96

The total amount due after 90 days is:

Total Due = Principal + Interest = $5,000 + $110.96 = $5,110.96

However, the attorney sells the note after only 60 days, so the amount due at that time is:

Amount Due = Principal + Interest = $5,000 + ($5,000 x 0.09 x (60/365)) = $5,075.34

The third party buys the note for $5,070, which means they will earn:

Earnings = Amount Received - Amount Invested = $5,070 - $5,075.34 = -$5.34

Since the third party lost money on the investment, the annual interest rate they earned must be negative.

Alternatively, we could calculate the annual interest rate that would have been earned if the note had been held for the full 90 days:

Interest = Principal x Rate x Time

$110.96 = $5,000 x Rate x (90/365)

Rate = $110.96 / ($5,000 x (90/365)) = 0.089 or 8.9%

So if the note had been held for the full 90 days, the annual interest rate earned would have been 8.9%.