Question

Premier, an electrical supply company, sold $6,400 of equipment to Center Wiring, Inc. Premier signed a promissory note on May 12 with 3.6% interest. The due date was August 10. Short of funds, Premier contacted Charter One Bank on July 20; the bank agreed to take over the note at a 5.3% discount.

A) $6,064.64
B) $6,118.72
C) $6,210.56
D) $6,335.28

Answer 1

To find the proceeds Premier will receive from Charter One Bank for the discounted note, we must calculate the maturity value of the note and the discount amount using the time from July 20 to August 10 and the respective interest and discount rates.

Step-by-step explanation:

We need to calculate the proceeds Premier will receive from Charter One Bank after discounting the promissory note with an interest rate of 5.3%. The note hasn't matured yet; the time from July 20 to August 10 should be taken into account when calculating the discount.

First, we must determine the maturity value of the note that Premier issued. The maturity value is the principal plus the interest earned until the due date. The interest can be calculated using the formula:

Interest = Principal × rate × time

We can calculate the time in years as (May 12 to August 10) which is about 90 days or 90/365 years. Therefore, the interest on the note can be calculated using the principal of $6,400, an annual interest rate of 3.6%, and time expressed in years.

Next, we'll calculate the discount amount offered by Charter One Bank, which uses a discount rate of 5.3%. The discount is figured over the time remaining on the note from July 20 to August 10. This will be subtracted from the maturity value of the note to find the proceeds that Premier will receive from the bank.