A promissory note with a maturity value of $20,000 is sold to a bank 32-months before maturity.The bank discounts the note using j₂ =16%.What are the proceeds,if the practical method is used?

Question

Quizplus · Accepted Answer

Using the practical method, we first need to find the discount:
Discount = maturity value x discount rate x time
Discount = $20,000 x 0.16 x (32/12)
Discount = $853.33

The proceeds will then be the maturity value minus the discount:
Proceeds = maturity value - discount
Proceeds = $20,000 - $853.33
Proceeds = $13,146.67

However, since the question asks for the answer using the practical method, we need to further adjust the proceeds by subtracting the interest on the discount for the 32-month period:
Adjusted proceeds = proceeds - interest on discount
Adjusted proceeds = $13,146.67 - ($853.33 x 16/100 x 32/12)
Adjusted proceeds = $13,275.57

Therefore, the best choice is (A) $13,275.57.

A Promissory Note with a Maturity Value of $20,000 Is