Question

Zakir loans Panji $20,000 for one year at 8% simple interest. Three months later, Zakir sells the note to Ben at a simple discount rate of 7 3/4%. How much does Ben pay for the note?

Answer 1

The maturity value of the note is
.. mv = P*(1 +rt) = 20,000*(1 +.08*1) = 21,600

The note is sold to Ben at the discounted price of
.. 21,600*(1 -rt)
.. = 21600*(1 -.0775*0.75) . . . . . 9 months is 0.75 years
.. = 20,344.50

Ben pays $20,344.50 for the note, which has a maturity value of $21,600.