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 exact method is used for fractional time periods.

Question

Quizplus · Accepted Answer

To find the present value of the note, we need to discount the future value back to the present using the given interest rate. The time period between October 15, 2010 and February 1, 2011 is 3.5 months, or 7/24 years. Using the exact method for fractional time periods, we can compute the discount factor as:

(1 + j)^n = (1 + 0.12)^(7/24) = 1.032123

The present value of the note is then:

PV = FV / (1 + j)^n = 30000 / 1.032123 = 29059.134 ≈ $28,959.25

Therefore, the bank paid $28,959.25 for this note. The correct answer is A.

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