Question

A bank charges a simple 5% discount on short-term loans. Determine the value of the document, without interest, given to the bank if the borrower receives $2,500 for 60 days.

$2,521.01
$2,525.00
$2,480.95
$2,490.00

Answer 1

The face value of the document given to the bank for a $2,500 short-term loan at a simple 5% discount rate for 60 days is $2,521.01.

Step-by-step explanation:

The question involves calculating the value of a document without interest that results in the borrower receiving a $2,500 loan from a bank with a simple 5% discount rate for a short-term of 60 days. To calculate the original amount of the document given to the bank (also known as the face value), we can use the following formula for simple discount: Face Value = Loan Amount / (1 - (Discount Rate * Time/360)). In this case, the bank charges a simple discount, not an interest rate, so the calculation is slightly different than calculating with interest rate. Applying this formula, we have Face Value = $2,500 / (1 - (0.05 * 60/360)) = $2,500 / (1 - (0.05 * 1/6)) = $2,500 / (1 - 0.008333) = $2,500 / 0.991667 = $2,521.01.