The following interest-bearing promissory notes were discounted at a bank by the payee before maturity. Use the ordinary interest method, 360 days, to calculate the missing information.

Face

Interest

Date of

Term of

Maturity

Maturity

Date of

Discount

Discount

Value

Rate (%)

Note

Note (days)

Date

Value

Discount

Period (days)

Rate (%)

Proceeds

19.

$8,000

9

May 10

90

July 5

10.2

To calculate: The maturity date, maturity value, discount period and proceeds of the promissory note where face value is $8,000, interest rate is 9% for 90 days. On 10 May, note was discounted at the rate 10.2% and the date of the note is 10 May.

Given Information:

Face value is $8,000, interest rate is 9% for 90 days. On 10 May, note was discounted at the rate 10.2% and the date of the note is 10 May.

Formula used:

Steps for determining maturity date of a loan are:

Step1. Calculate the number of days that are left in the month loan is taken by subtracting the loan date from the number of days in the month.

Step2. Subtract the number of days remaining in the first month from the total duration of loan.

Step3. Keep on subtracting the days from consequent months until the maturity date corresponds to the difference.

The formula to calculate Maturity value is,

MV=P(1+RT)

Where, MV is Maturity value, P is Principal Amount, R is the rate of interest, and T is the time duration.

Steps for determining number of days of a loan are:

Step1. Calculate the number of days that are left in the month loan is taken by subtracting the loan date from the number of days in the month.

Step2. Determine the number of days for next succeeding months.

Step3. Calculate the number of days that are left in the last month till the due date.

Step4. Add all the days calculated.

The formula to calculate the time for ordinary interest is,

Time=Number of days of a loan360

The formula to compute the amount of bank discount is,

Bank Discount=Maturity value×Discount Rate×Time

The formula to calculate amount of proceeds is,

Proceeds=Maturity value−Discount

Calculation:

Calculate the number of days that are left in the month when the loan was taken by subtracting the loan date from the number of days in the month as:

Number of days left=Total days in that month−Loan Date=31−10=21

Subtract the number of days left that were left when the loan was taken from the total duration of the loan as:

90−21=69

In the month of June, July, there are total of 61 days. So, out of 69 days, 61 will be utilized by the month of June and July.

Now, total number of remaining days are 8.

So, maturity date is August 8.

Consider that principal amount is $8,000, rate of interest is 9%, time duration is 90 days.

Simplify the rate of interest as,

9%=9100=0.09

The principal amount is same as the face value.

Compute the maturity value by substituting $8,000 for principal amount, 0.09 for rate of interest, 90360 for time duration in the formula, “MV=P(1+RT)” as,

MV=P(1+RT)=$8,000(1+0.09×90360)=$8,000(1+0