On May 12, Bob Campbell accepted a $5,000 note in granting
a time extension of a bill of goods bought by Rick Ween.
Terms of the note were 8% for 120 days. On July 8, Bob
needed to raise cash and discounted the note at Rick’s bank
at a discount rate of 9%. Calculate Bob’s proceeds.
To calculate Bob's proceeds from discounting the note, we need to understand the concept of discounting. Discounting is a process where the future value of a note, bill, or loan is adjusted to its present value by deducting the interest rate for a specific period.
First, let's find the maturity date of the note. The note was accepted on May 12, and the term is 120 days. To calculate the maturity date, we add 120 days to May 12:
May 12 + 120 days = September 10
Now let's find the time between the date Bob needed to raise cash (July 8) and the maturity date (September 10):
September 10 - July 8 = 64 days
Next, we calculate the interest that has accrued during this period. The interest is determined by multiplying the face value of the note ($5,000) by the interest rate (8%) and dividing it by the number of days in a year (365 days), and then multiplying it by the number of days from July 8 to the maturity date (64 days):
Interest = ($5,000 * 8% / 365) * 64
Now let's calculate Bob's proceeds by subtracting the interest from the face value of the note:
Proceeds = Face value of the note - Interest
Please substitute the values into the formulas to calculate Bob's proceeds.