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Chapter 11 Problems and Solutions

11-10 - Interest and Effective Interest Rate 11-13 - Interest and Effective Interest Rate 11-14 - Discounting an Interest-Bearing Note 11-16 - Discounting an Interest-Bearing Note Click here to view all problems and solutions. Chapter 11 Problems and Solutions. Problem 11-10.

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Chapter 11 Problems and Solutions

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  1. 11-10 - Interest and Effective Interest Rate 11-13 - Interest and Effective Interest Rate 11-14 - Discounting an Interest-Bearing Note 11-16 - Discounting an Interest-Bearing Note Click here to view all problems and solutions Chapter 11 Problems and Solutions

  2. Problem 11-10 On January 18, 2007, Business Week reported yields on Treasury bills. Bruce Martin purchased a $10,000, 13-week Treasury bill at $9,881.25. (a) What was the amount of interest? (b) What was the effective interest rate? Round to the nearest hundredth percent. Step 1: Calculate the interest amount earned. $10,000 – 9,881.25 = $118.75 interest Step 2: Calculate the effective interest rate. $118.75 = $118.75 = .048070841 = 4.81% effective interest rate $9,881.25 x 13 $2,470.3125 52

  3. Problem 11-13 Annika Scholten bought a $10,000, 13-week Treasury bill at 5%. What is her effective rate? Round to the nearest hundredth percent. Step 1: Calculate the interest amount earned using I=PRT. $10,000 x .05 x 13 = $125 interest 52 Step 2: Calculate the effective interest rate. $125 = $125 = .0506329 = 5.06% effective interest rate $9,875 x 13 $2,468.75 52

  4. Problem 11-14 Ron Prentice bought goods from Shelly Katz. On May 8, Shelly gave Ron a time extension on his bill by accepting a $3,000, 8% 180-day note. On August 16, Shelly discounted the note at Roseville Bank at 9%. What proceeds does Shelly Katz receive? Step 1: Calculate the discount period. • 228 August 16 • 128 May 8 • 100 days passed 180 – 100 = 80 days discount period Step 2: Calculate the interest using I=PRT. $3,000 x .08 x 180 = $120 interest 360 Step 3: Calculate maturity value. $3,000 + 120 = $3,120 MV

  5. Problem 11-14 continued Step 4: Calculate the bank discount. $3,120 x .09 x 80 = $62.40 bank discount 360 Step 5: Calculate the proceeds. $3,120 – 62.40 = $3,057.60 proceeds

  6. Problem 11-16 On May 12, Scott Rinse accepted an $8,000, 12%, 90-day note for a time extension of a bill for goods bought by Ron Prentice. On June 12, Scott discounted the note at Able Bank at 10%. What proceeds does Scott receive? Step 1: Calculate the discount period. • 163 June 12 • 132 May 12 • 31 days passed 90 – 31 = 59 days discount period Step 2: Calculate the maturity value. $8,000 x .12 x 90 = $240 interest + $8,000 = $8,240 MV 360 Step 3: Calculate the bank discount. $8,240 x .10 x 59 = $135.04 bank discount 360 Step 4: Calculate proceeds. $8,240 – 135.04 = $8,104.96 proceeds

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