On March 5,Weber Services discounts a customer's 9%,60-day,$10,000 note dated January 20.The discount rate charged by the bank is 12%.The discount period is:
A)24 days.
B)16 days.
C)60 days.
D)0 days.

Question

Quizplus · Accepted Answer

To find the discount period, we need to calculate how many days have elapsed between the date the note was discounted (March 5) and the maturity date (60 days after January 20).

60 days - 45 days (from Jan 20 to March 5) = 15 days

However, we also need to consider the fact that the bank charges a discount rate of 12%, which means that Weber Services receives only 88% of the face value of the note ($10,000). We can calculate the actual amount received by Weber Services as follows:

$10,000 x 0.88 = $8,800

Therefore, the effective interest charged by the bank is:

($10,000 - $8,800) / $10,000 x 360 / 15 = 28.8%, which is higher than the bank's stated discount rate of 12%.

To avoid this steep effective interest rate, Weber Services should look for alternative sources of financing.

On March 5,Weber Services Discounts a Customer's 9%,60-Day,$10,000 Note Dated