Question

On June 1, 2018, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $560,000 and a discount rate of 5%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2018?

Answer 1

Answer:

PV 550,506.64

Explanation:

$Nominal \times (1 - \: discount \: rate)^{time} = \: Present \: Value$

$560,000 \times \: (1-0.05)^{4/12} = PV$

PV = 550,506.64

We can convert the discount rate to interest rate and reach the same value:

$i= \frac{d}{1-d} = 0.05/0.95 = 0.052631578$

$\frac{Nominal}{(1+rate)^{time}} = PV$

$\frac{560,000}{(1+0.052631578)^{1/3}} = PV$

PV = 550,506.64