A $10000 6% 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period-interest combinations?
A) 5 interest periods 6% interest
B) 20 interest periods 6% interest
C) 20 interest periods 1.5% interest
D) 5 interest periods 1.5% interest

Question

Quizplus · Accepted Answer

We need to find the present value of a $10000 6% 5-year note payable that pays interest quarterly. Therefore, we need to use tables that show the periodic interest for quarterly payments. That is, we need the interest rate per quarter. The formula to calculate this interest rate is:

(1 + periodic interest rate)^number of periods = 1 + annual interest rate
(1 + i)^4 = 1 + 0.06
(1 + i) = (1 + 0.06)^(1/4)
(1 + i) = 1.01477
i = 0.01477 or 1.477%

Therefore, we need to use tables that indicate 20 interest periods (5 years * 4 quarters per year) at a periodic interest rate of 1.5% (half of the quarterly interest rate we just calculated). Choice C is the only option that meets these criteria.

A $10000 6% 5-Year Note Payable That Pays Interest Quarterly