A non-interest bearing long term promissory note is due on February 1,2011.The loan amount was $30,000.On October 15^th,2010 the note was sold to a bank that charges interest at j₁₂ = 12%.How much did the bank pay for this note? Assume the practical (or approximate)method is used for fractional time periods.

Question

Quizplus · Accepted Answer

To calculate the present value of the note, we need to discount the future value of the note by the interest rate charged by the bank. However, since the note has been sold on October 15, 2010, we need to take into account the time period between the sale date and the due date of the note.

The time period between October 15, 2010, and February 1, 2011, is 3.5 months or 0.2917 years (approximately). Therefore, the present value of the note is:

PV = FV / (1 + r)^t
PV = 30,000 / (1 + 0.12)^0.2917
PV = 28,962.10

Therefore, the bank paid $28,962.10 for the note.

The correct answer is A.

A Non-Interest Bearing Long Term Promissory Note Is Due on February