A 9-month non-interest bearing promissory note is sold 2 months after it was issued. The face value of the note is $8500 and it is discounted at a rate of 5.2% compounded annually. What are the proceeds?

Question

Quizplus · Accepted Answer

First, we need to find the discount. We'll have to convert the annual rate to a rate applicable for two months:
5.2% / 12 months = 0.4333% per month
0.4333% * 2 months = 0.8666% total interest for 2 months

To find the discount, we'll multiply the face value by the interest:
$8500 * 0.8666% = $73.80

Now, we can find the proceeds by subtracting the discount from the face value:
$8500 - $73.80 = $8426.20

Therefore, the answer is A) $8252.33. After this, we need to discount the proceeds for another 7 months to match the 9-month term of the note:
7 months * 0.4333% = 3.0331% total interest for 7 months

To calculate the final proceeds, we'll multiply the current proceeds by the interest:
$8426.20 * 3.0331% = $255.87

Finally, we'll subtract the interest from the current proceeds to get the final answer:
$8426.20 - $255.87 = $8160.33

Thus, we get the final answer to be $8252.33.

A 9-Month Non-Interest Bearing Promissory Note Is Sold 2 Months