Question

(1 point) Jim lends S9000 to Sally on September 23, 2006. Sally signs a promissory note, with the note due in 10 months. The maturity value of the note is $9720. Jim sels the note to a bank on February 23, 2007. If the bank wishes to earn 4%, what price does Jim get for the note? Answer: S

Answer 1

Note value on Sep 23,2006=$9,000

Note due period=10 months

Maturity value after 10 months=$9,720

Jim sold the note to bank on February 23,2007 i.e after 5 months

Banks get $9,720 on maturity

It wants to earn 4% on the transaction

So, if the bank advance $1,it will get 4% of $1=$0.04

So, if the bank receives $1.04 on maturity, it advances $1 to Jim

i.e. If the bank receives $9,720 on maturity, it advances 9720/1.04=9,346

So, when bank gives $9,346, it will earn 374 as discounting charges which is 4% of $9346 and gets $9,720

So, jim gets the note at $9,346