[jessanqi]

can someone help if the calculation is wrong? I think to discount the $31500 to four months ago should use $31500/discount rate, instead times the rate.

Is this correct??

Tallent Company received a $30,000, 6-month, 10% interest-bearing note from a customer. After holding the note for two months, Tallent was in need of cash and discounted the note at the United National Bank at a 12% discount rate. The amount of cash received by Tallent from the bank was

A. $31,260
B. $30,870
C. $30,300
D. $30,240

Explanation
The correct answer is D. There are two separate computations required in order to answer this question. First, we must determine the maturity value of the note received by Tallent from its customer; and second, based on this maturity value we compute the proceeds to Tallent upon its discounting of the note at United National Bank.
Face value of note $30,000
Life of note: 6 months
Interest rate stated on note: 10%
Interest to maturity: ($30,000 × 1/2 year × 10% per year) $1,500
Maturity value of note: ($31,500 + $1,500) $31,500
Time note will be held by bank: 4 months
Bank discount rate: 12%
Less: Bank discount based on maturity amount: $31,500 × 1/3 year × 12% per year $(1,260)
Proceeds upon discounting $30,240

[Anonymous]

Note principal = 30,000
Interest on note at maturity = 30,000 x 10% x 6/12 = 1,500
Total if hold to maturity = 30,000 + 1,500 = 31,500. This is the total cash Tallent would get if it holds the note to maturity. This is also the total the bank will receive from note issuer at maturity. This is the amount including the interest that bank wants to earn at the bank’s expected rate. This is the future value (FV)
Think about it is like a new non-interest bearing note to the bank, so the total 31,500 is like a new face amount of a new note to the bank. So the bank needs to calculate the interest based on its rate of return for the period from the discounting date to the maturity. This is bank’s discount.
Bank discount (discount on the “new” note) = 31,500 x 12% x (6-2)/12 = 1,260
Cash proceeds = 31,500 – 1,260 = 30,240

“$31500/discount rate” will result in a large amount unless the rate in this calculation is more than 1. Bank would pay more now for a less value in future? No.

[jessanqi]

Hi @ckcpa18! thank you so much for the help!

I think this one confused me “Bank discount (discount on the “new” note)”.
so when bank discount note, calculate the discount amount using on the maturity value (Face value) * effective interest *period right?
I don't remember this at all… need to go back review the Present Value section again.

Thanks again, really appreciated! 🙂

[Author]

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