[mnm87]

Question : when calculating the proceeds received from discounting

Face

+interest = Face x % int rate x time period

= Maturity value

– Discount = Maturity x discount rate x remaining period

= proceeds from discount

My question is lets say it was a 6 month note and i discount it after 2 months.

why is the maturity time period 6/12?

Why is the discount remaining period 4/12?

Why is it over the whole year and not 6 months? so 6/6 and 4/6?

[A] - 86 7-2013
[F] - 70 - Retake May 23rd 2014 80
- 10/29/14
[R] - 11/30/14

[Anonymous]

Don't overthink this question. Remember how to calculate interest- you always use one year. For a 6 month note, you would never use 6/6, it would always be 6 months out of 12 months. The reason that the discount remaining period would be 4/12 is because the bank purchases a 6 month note after it has been held for 2 months..therefore, interest is only being calculated at the new discount rate for 4 months.

[Anonymous]

Don't overthink this question. Remember how to calculate interest- you always use one year. For a 6 month note, you would never use 6/6, it would always be 6 months out of 12 months. The reason that the discount remaining period would be 4/12 is because the bank purchases a 6 month note after it has been held for 2 months..therefore, interest is only being calculated at the new discount rate for 4 months.

[pg2324]

The reason that you take 6/12 when calculating the maturity value is because interest rates are generally expressed as ANNUAL rates. So even if the note has a 6-month maturity, the stated rate on the note refers to APR (annual percentage rate)

If the interest rate was 10% and the note's face value was $1,000, then you would *not* receive $1000 x .10 x 12/12 = $100. Instead, you would receive $1,000 x .10 x 6/12 = $50. You would only receive 6 months worth of interest, not the entire 12 months.

When it comes to interest rates, i have always seen them expressed as annual rates.

[pg2324]

The reason that you take 6/12 when calculating the maturity value is because interest rates are generally expressed as ANNUAL rates. So even if the note has a 6-month maturity, the stated rate on the note refers to APR (annual percentage rate)

If the interest rate was 10% and the note's face value was $1,000, then you would *not* receive $1000 x .10 x 12/12 = $100. Instead, you would receive $1,000 x .10 x 6/12 = $50. You would only receive 6 months worth of interest, not the entire 12 months.

When it comes to interest rates, i have always seen them expressed as annual rates.

[Author]

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