Question

Anderson Co. issued a $40,216, 60-day, discounted note to National Bank. The discount rate is 10%. At maturity, assuming a 360-day year, the borrower will pay:_____.a. $40,216.b. $39,546.c. $40,886.d. $49,500.

Answer 1

a. $40,216

Step-by-step explanation:

Discounted Loan note does not have any periodic interest payment obligation. It is issued at a discounted value that gradually accumulates the face value of the loan note at the time of maturity.

Issuance price can be calculated as follow

Discounted value = Face value / ( 1 + periodic interest rate )^ numbers of periods

Placing values in the formula

Discounted values = $40,216 / ( 1 + 10%/360 )^60

Discounted values = $39,551.38

After 60 days accreud interest will be

Interest = $39,551.38 x ( ( 1 + 10%/360 )^60 - 1 ) = $664.62

Borrower will pay = $39,551.38 + $664.42 = $40,216