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Warren borrowed $14,000 on a noninterest-bearing, simple discount, 4
Warren borrowed $14,000 on a noninterest-bearing, simple discount, 4.5% 60 day note. Assume ordinary interest. What are:
i) The maturity value,
ii) Bank's discount,
iii) Warren's proceeds,
iv) Effective interest rate to the nearest 100th?
Expert Solution
(i) Computation of the maturity value:-
Maturity Value = Face Value
= $14,000
(ii) Computation of the bank's discount:-
Bank's discount = Maturity value * Bank discount rate * Time
= $14,000 * 4.5% * 60 / 360
= $105
(Assume 360 days in a year)
(iii) Computation of the Warren's proceed:-
Proceed = Maturity value - Bank's discount
= $14,000 - $105
= $13,895
(iv) Computation of the effective interest rate:-
Effective interest rate = Interest / (Proceeds * Time)
= $105 / ($13,895 * 60 / 360)
= $105 / $2,315.83
= 4.53%
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