To determine To calculate: The amount of money paid by the broker for the note. Explanation Given: A $ 21 , 000 note is accepted by the firm, which is due in 8 months with interest rate 10.5 % . Two months before it is due, the note is sold to the broker by the firm. The broker wants to earn a 12.5 % return on his investment. Formula used: A = P ( 1 + r t ) where future value ( A ) , rate of interest ( r ) , time ( t ) and principal value ( P ) Calculation: Step 1: First, the maturity value needs to be calculated. So, the principal value ( P ) is $ 21 , 000 , the rate of interest ( r ) is 10.5 % and the time ( t ) is 8 months. Rate is expressed as a decimal. Thus, to convert the rate percent into a decimal, rate percent is divided by 100 . r = 10.5 % = 10.5 100 r = 0.105 Step 2: The time is to be expressed in the year. Thus, to convert the time into the year, the months are divided by 12 . t = 8 12 Y e a r s t = 2 3 Y e a r s Step 3: The maturity value or the future value ( A ) is calculated by adding 1 to the product of rate and time and by multiplying the whole result by principal value as shown below: A = P ( 1 + r t ) = $ 21 , 000 [ 1 + 0.105 ( 2 3 ) ] = $ 21 , 000 × 1.07 A = $ 22 , 470 Thus, the maturity value ( A ) of $ 21 , 000 note is $ 22 , 470

12th Edition

ISBN: 9780134773285

Author: MULLINS

Publisher: YUZU

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Chapter 5.1, Problem 7CP

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To calculate: The amount of money paid by the broker for the note.

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