Business Mathematics Brief 12th Edition by Stanley Salzman ,Gary Clendenen, Charles Miller

Exercise 160

Find the discount period for each of the following. (See Examples. Step 2.)
Finding Proceeds
Blues Recording holds a 200-day simple interest note from a rock group that agreed to pay them to record an album and produce 1000 CDs. The 12% simple interest note is dated March 24 and has a face value of $48,000. Blues Recording wishes to convert the note to cash, so they sell it to a bank on August 15. If the bank requires a discount rate of 12.5%, find the proceeds to the recording studio.

Quick TIP
When finding the bank discount, be sure to use the maturity value of the original note.
SOLUTION
Go through the two steps of discounting a note.

Finding the Proceeds
Benson Automotive used excess cash to purchase a $100,000 Treasury bill with a term of 26 weeks at a 3.5% simple discount rate. However, the firm needs cash exactly 8 weeks later and sells the T-bill. During the 8 weeks, market interest rates changed slightly so that the bill was sold at a 3% discount rate. Find (a) the initial purchase price of the T-bill, (b) the proceeds received by the firm at the subsequent sale of the T-bill, and (c) the effective interest rate.
SOLUTION

The company would have earned 3.5% on the T-bill had it left the Treasury bill invested until maturity. Instead, the company sold it after market interest rates rose, but before the T-bill matured. This caused the company to end up with an effective interest rate somewhat higher than the 3.5%.