A building contractor gives a $14,000 promissory note to a plumber who has loaned him $14,000. The note is due in 9 months with interest at 9%. months after the note is signed, the plumber sells it to a bank. If the bank gets an 11% return on its investment, how much will the plumber receive? Will it be enough to pay a bill for $14,001?
To calculate the amount the bank will pay for the promissory note, we first need to calculate the total amount due at the end of 9 months.
The formula to calculate the total amount due on a promissory note is:
Total amount due = Principal + (Principal x Rate x Time)
Where:
- Principal = the original amount of the loan or note
- Rate = the interest rate
- Time = the time period, in years, for which the interest is calculated
In this case, the Principal is $14,000, the Rate is 9%, and the Time is 9/12 or 0.75 years (since the note is due in 9 months).
Total amount due = $14,000 + ($14,000 x 0.09 x 0.75)
Total amount due = $14,000 + $945
Total amount due = $14,945
So the total amount due on the promissory note is $14,945.
Now we need to calculate the amount the bank will pay for the promissory note, based on its desired return of 11%.
To calculate the price the bank will pay for the note, we can use the following formula:
Price = Total amount due / (1 + Rate x Time)
Where:
- Total amount due = the amount due on the promissory note
- Rate = the desired return rate
- Time = the time period, in years, for which the return is calculated
In this case, the Total amount due is $14,945, the Rate is 11%, and the Time is 3/12 or 0.25 years (since the note was sold 3 months after it was signed).
Price = $14,945 / (1 + (0.11 x 0.25))
Price = $14,248.58
So the bank will pay the plumber $14,248.58 for the promissory note.
This is not enough to pay a bill for $14,001, so the plumber will still owe $752.42.