Blossom Inc. loans money to John Kruk Corporation in the amount of $814,800. Blo
ID: 2409624 • Letter: B
Question
Blossom Inc. loans money to John Kruk Corporation in the amount of $814,800. Blossom accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Blossom needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Blossom will receive on the sale of the note? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Explanation / Answer
Solution:
Amount will be received by Blossom on sale of note = Present value of interest and principal discounted at 5% semiannual rate
Semi annual interest recevied by Blossom Inc = $814,800 * 4% = $32,592
Remaining period of maturity after 2 years = 5 years, 10 semi annual period
Amount received on sale of note = ($32,592 * Cumulative PV factor at 5% for 10 periods) + ($814,800 * PV Factor at 5% for 10th period)
= ($32,592* 7.72173) + ($814,800 * 0.61391)
= $751,880