Question

The following 12%, $1,000 notes were issued on December 1. Which of the following is the correct method of calculation for the interest accrued as of December 31 of the same year on each of the notes described? Select one:

A. Interest on a 4-month note is calculated as: $1,000 × 12% × 1/12.
B. Interest on a 3-month note is calculated as: $1,000 × 12% × 1/3.
C. Interest on a 2-year note is calculated as: $1,000 × 12% × 1/24.
D. Interest on a 4-month note is calculated as: $1,000 × 12% × 1/4.

Answer 1

A) Interest on a 4-month note is calculated as: $1,000 × 12% × 1/12.

Step-by-step explanation:

Each note is worth $1,000

Each note carries a 12% interest rate

Only one month has passed since the notes were issues, so the time = 1/12

Therefore the interest accrued from December 1 to December 31 = note value x note's interest x time = $1,000 x 12% x 1/12 = $10