Exam 7: Applications of Simple Interest

Mayfair Fashions has a $90,000 line of credit from the Bank of Montreal. Interest at prime plus 2% is deducted from Mayfair's chequing account on the 24^th of each month. Mayfair initially drew down $40,000 on March 8 and another $15,000 on April 2. On June 5, $25,000 of principal was repaid. If the prime rate was 5.25% on March 8 and rose by 0.25% effective May 13, what were the first four interest deductions charged to the store's account?

Calculate missing value for the promissory note:

Paul has $20,000 to invest for 6 months. For this amount, his bank pays 3.3% on a 90-day GIC and 3.5% on a 180-day GIC. If the interest rate on a 90-day GIC is the same 3 months from now, how much more interest will Paul earn by purchasing the 180-day GIC than by buying a 90-day GIC and then reinvesting its maturity value in a second 90-day GIC?

Commercial Paper with a face value of $1,000,000 issued at a discount rate of 7.5% has a term of 360 days. At what price was it issued?

Calculate missing value for the promissory note:

Sarah's Canada Student Loans totalled $9400 by the time she graduated from Georgian College in May. She arranged to capitalize the interest on November 30 and to begin monthly payments of $135 on December 31. Sarah elected the floating rate interest option (prime plus 2.5%). The prime rate stood at 6.75% on June 1, dropped to 6.5% effective September 3, and then increased by 0.25% on January 17. Prepare a repayment schedule presenting details of the first three payments. February has 28 days.

George borrowed $4000 on demand from CIBC on January 28 for an RRSP contribution. Because he used the loan proceeds to purchase CIBC's mutual funds for his RRSP, the interest rate on the loan was set at the bank's prime rate. George agreed to make monthly payments of $600 (except for a smaller final payment) on the twenty-first of each month, beginning February 21. The prime rate was initially 6.75%, dropped to 6.5% effective May 15, and decreased another 0.25% on July 5. It was not a leap year. Construct a repayment schedule showing the amount of each payment and the allocation of each payment to interest and principal.

Over the past 35 years, the prevailing market yield or discount rate on 90-day T-bills has ranged from a low of 0.20% in May, 2009 to a high of 20.82% in August of 1981. (The period from 1979 to 1990 was a time of historically high inflation rates and interest rates.) How much more would you have paid for a $100,000 face value 90-day T-bill at the May 2009 discount rate than at the August 1981 discount rate?

What interest rate was used to discount 270-day, $750,000 commercial paper when it was issued for $710,000?

Determine the legal due date for: a) A 5-month note dated September 29, 2010. b) A 150-day note issued September 29, 2010.