Anyone offer any help here?

Q. Mark signs a note promising to pay $550 in 3 years with simple interest at 9.5%. Then, 3 months before the note comes due, the holder of the note sells it to a local bank which discounts the note based on a bank discount rate of 16%.

a) What did the bank pay the holder of the note when it was sold 3 months before maturity?

b) What simple interest rate did the holder of the note earn for the time the note was held? -
the answer to this part is 8.5%


Trying to help a friend out, but I my finance-math knowledge is limited.

[Edited on February 9, 2006 at 11:00 PM. Reason : ]

2/9/2006 11:00:02 PM

well this is just a quick guess, but here goes:

a) set X = 550/(1.095)^3, then set y = X/(1.16)^.25, Y is your answer

b) set Y = 550/(1+Z)^2.75, solve explicitly for Z that is your answer

disclaimer i've never had any sort of fin. math this could be totally wrong

2/10/2006 12:19:16 AM

You're thinking of a compounded annually interest rate, kartelite. Other than that you've got the right idea, for part a, anyway (you're a little backwards on b).

Instead you need to use the simple interest and bank discount equations (these are types of interest rates other than compound interest). These are:

S.I.:

FV = PV(1 + rt)

B.D.:

PV = FV(1 - dt)

2/10/2006 12:34:17 AM

that's what i get for not reading the question

2/10/2006 12:51:12 AM

Example is in the text packet

2/10/2006 3:09:34 PM