Chapter 11 Extra Credit 5 Points Due By Wednesday

Chapter 11 Extra Credit 5 points Due by The End Of Wednesday 822to Be

Calculate the proceeds Mr. Robie will receive when discounting a note, using ordinary interest, given the invoice amount, note terms, and bank discount rate.

Paper For Above instruction

Mr. Robie of Black Cat Bakery supplied goods worth $2,200 to Save-O-Store, invoiced with a due date of September 15. Save-O-Store requested to pay via a 60-day promissory note at a 4.75% interest rate on September 12, which Mr. Robie accepted. Later, Mr. Robie discounts the note at Healthy Bank on October 2, with a 5% discount rate. The objective is to determine the proceeds Mr. Robie receives from the bank, considering ordinary interest calculations.

To find the proceeds, we first determine the face value of the note, which is $2,200. The note duration is from September 12 to November 11 (60 days). Since the note is discounted on October 2, we need to calculate the interest accrued for the period from September 12 to October 2, and from October 2 to the maturity date.

Using the ordinary interest formula:

Interest (I) = Principal (P) x Rate (R) x Time (T)

where Time (T) is expressed in years, and with a 360-day year approach, T = days/360.

First, determine the date counts:

  • Days from September 12 to October 2: 20 days
  • Remaining days to maturity: 40 days (from October 2 to November 11)

Calculate the interest accrued from September 12 to October 2:

I = 2,200 x 0.0475 x (20/360) = $2,200 x 0.0475 x 0.05556 ≈ $5.83

Interest from October 2 to maturity (including the 40 days):

I = 2,200 x 0.0475 x (40/360) ≈ $11.66

The total interest for the entire period (from September 12 to maturity) is approximately $17.49.

However, since Mr. Robie is discounting the note on October 2, he is entitled to the face value minus the discount at that date. The discount at Healthy Bank is calculated as:

Discount = Face Value x Discount Rate x Time (from October 2 to maturity) in years.

Time from October 2 to maturity: 40 days or 40/360 ≈ 0.1111 years.

Discount = 2,200 x 0.05 x 0.1111 ≈ $12.22

Proceeds to Mr. Robie = Face value - discount = $2,200 - $12.22 ≈ $2,187.78

Therefore, Mr. Robie will receive approximately $2,187.78 when the bank discounts the note using ordinary interest.

References

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