Bob purchased a promissory note on January 1t, 2009 which agreed to pay simple i
ID: 2817229 • Letter: B
Question
Bob purchased a promissory note on January 1t, 2009 which agreed to pay simple interest in the amount 8.0% per year. The note will mature and be paid on April 1st, 2009, 90 days later, Bob sells the note to Sally on February 12th, 2009 (i.e. 42 days after purchasing) for an amount that causes Sally's yield rate on the note to be equivalent to simple interest of 6.3% per year. Sally cashes in the note on April 1t, 2009 for 5000.00. Note: There are 365 days in a year. What is Bob's annual yield rate (simple interest) on the note? Give your answer as a percentage rounded to two places. Do not round ourcalculations, at least not too much, until the very end.Explanation / Answer
Solution :- Sally's yeild rate = 6.3% per year
The Sally cashes the note = 5000
The date of purchase of Sally = 12th feb
The holding period of Sally = 12th Feb - 1st April = 16 + 31 + 1 = 48 days
therefore = 5000 = Price + (Price*6.3%*48/365)
then Price = 4958.92
The Sally purchase the note on 12th feb at amount = 4958.92
therefore we can clearly say the BOb sold the note at 4958.92 $
Bob hold the Note upto 42 days ( 90-48)
The rate for Bob = 8%
Now 5000 = Price + Price*8%*90/365
Therefore price = 4903.28 $
The Bob annual yeild rate =
= (4958.92-4903.28) / 4903.28 = 55.64/4903.28 = 1.1347% in 42 days
therefore annual yield = 1.1347 * 365/42 = 9.86%
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