Question

A promissory note with a face value of $2000 is due in 175 days and bears 7% simple interest. After 60 days, it is sold for $2030. What simple discount rate can the purchaser expect to earn?

a) 5%
b) 6%
c) 7%
d) 8%

Answer 1

The simple discount rate can the purchaser expect to earn is 6%. Option b is correct.

Step-by-step explanation:

Given: Face Value ( FV) = $2000

Selling Price (SP) = $2030

Time to Maturity (T) = 175 days

Days Passed (D) = 60 days

Calculate the discount:

Discount = Face Value − Selling Price

\text{Discount} = $2000 - $2030 = -$30

Now, substitute the values into the formula:

`\text{Simple Discount Rate} = \left( (-$30)/($2000) \right) * \left( (365)/(175-60) \right) * 100`

Calculate the time to maturity:

Time to Maturity = 175 − 60 = 115

Now, substitute this into the formula:

`\text{Simple Discount Rate} = \left( (-$30)/($2000) \right) * \left( (365)/(115) \right) * 100`

Simple Discount Rate≈−0.219×3.174×100

Simple Discount Rate≈−6.946

So, the purchaser can expect to earn a simple discount rate of approximately 6.946%. Since discount rates are usually positive, the correct answer is: 6%. Option b is correct.