Instruction 20.1: Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
-Refer to Instruction 20.1. What is the size of the discount (not including the commission fee)Cypress must take for receiving the proceeds of the sale today rather than waiting for six months?

Question

Quizplus · Accepted Answer

To find the discount, we need to calculate the interest earned on the banker's acceptance if held to maturity (6 months) and compare it to the amount received if discounted (sold) to the bank.
Interest earned on banker's acceptance = $1,000,000 x 1.4% x (6/12) = $7,000
Amount received if discounted = $1,000,000 - ($1,000,000 x 1.00% x (6/12)) = $995,000
Discount = $1,000,000 - $995,000 = $5,000