Albert purchased Bonzo's car for $500 cash and a non-interest bearing promissory note for $2,000 payable in two years. How much money can Bonzo expect to receive for the note if he immediately sells it to Corleone Finance Company at a discount rate of 30% compounded monthly?

Question

Quizplus · Accepted Answer

To determine the present value of the $2,000 note that Bonzo sells to Corleone Finance Company, we use the formula for the present value of a single future amount: $PV = \frac{FV}{(1 + r)^n}$, where PV is the present value, FV is the future value ($2,000), r is the monthly interest rate (30% annual rate compounded monthly gives a monthly rate of $30\% / 12 = 2.5\%$, or 0.025 as a decimal), and n is the total number of compounding periods (2 years * 12 months/year = 24 months).Substituting the values, we get:$$PV = \frac{2000}{(1 + 0.025)^{24}}$$$$PV = \frac{2000}{(1.025)^{24}}$$$$PV = \frac{2000}{1.8061}$$ (rounded off)$$PV = 1106$$ (rounded to the nearest dollar)Therefore, Bonzo can expect to receive $1,106 for the note if he sells it immediately to Corleone Finance Company.

Albert Purchased Bonzo's Car for $500 Cash and a Non-Interest