Asked by Abigail Dupont on May 05, 2024
Verified
A $10000 6% 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period-interest combinations?
A) 5 interest periods 6% interest
B) 20 interest periods 6% interest
C) 20 interest periods 1.5% interest
D) 5 interest periods 1.5% interest
Note Payable
A written agreement where a borrower promises to pay back a certain sum of money to a lender at a future date, often with interest.
Discounted
The method of calculating the current value of a single payment or a series of future payments.
Interest Periods
Specific intervals of time over which interest is calculated and paid on financial investments or charged on loans.
- Determine the appropriate discounting period and interest rate for present value calculations involving notes payable or investments.
Verified Answer
FH
Frank HendricksMay 11, 2024
Final Answer :
C
Explanation :
We need to find the present value of a $10000 6% 5-year note payable that pays interest quarterly. Therefore, we need to use tables that show the periodic interest for quarterly payments. That is, we need the interest rate per quarter. The formula to calculate this interest rate is:
(1 + periodic interest rate)^number of periods = 1 + annual interest rate
(1 + i)^4 = 1 + 0.06
(1 + i) = (1 + 0.06)^(1/4)
(1 + i) = 1.01477
i = 0.01477 or 1.477%
Therefore, we need to use tables that indicate 20 interest periods (5 years * 4 quarters per year) at a periodic interest rate of 1.5% (half of the quarterly interest rate we just calculated). Choice C is the only option that meets these criteria.
(1 + periodic interest rate)^number of periods = 1 + annual interest rate
(1 + i)^4 = 1 + 0.06
(1 + i) = (1 + 0.06)^(1/4)
(1 + i) = 1.01477
i = 0.01477 or 1.477%
Therefore, we need to use tables that indicate 20 interest periods (5 years * 4 quarters per year) at a periodic interest rate of 1.5% (half of the quarterly interest rate we just calculated). Choice C is the only option that meets these criteria.
Learning Objectives
- Determine the appropriate discounting period and interest rate for present value calculations involving notes payable or investments.