Question

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note

Answer 1

$5,560

Step-by-step explanation:

Given the following:

Present value of note recorded by Leaf on purchase date = $19,485

Annual year end payments = $5,009

Number of payments required = 5

Therefore, total amount received by Leaf :

Annual year-end payment * number of payments

$5,009 * 5 = $25,045

Present value of note recorded at purchase =$19,485

Therefore, total interest revenue earned by Leaf over the life of this note:

Total amount received - present value of note recorded

$25,045 - $19,485

= $5,560