Juan-Solez, a prominent painter, takes out a simple discount note for one year from River National Bank for $5,000. The annual rate of Interest is 8%.What is the amount of the discount and the proceeds?
Accepted Solution
A:
To find the amount of discount and the proceeds, we need to understand the concept of a simple discount note.
A simple discount note is a financial instrument where a borrower (in this case, Juan-Solez) receives a loan from a bank (River National Bank) and agrees to repay the loan amount (the face value of the note) at maturity. However, instead of repaying the full face value, the borrower receives the loan amount minus the discount.
Given:
Face value of the note (loan amount) = $5,000
Annual interest rate = 8%
Maturity period = 1 year
First, let's calculate the amount of the discount:
Discount = Face value of the note * Annual interest rate * Maturity period
Discount = $5,000 * 0.08 * 1
Discount = $400
So, the amount of the discount is $400.
To calculate the proceeds, we subtract the discount from the face value of the note:
Proceeds = Face value of the note - Discount
Proceeds = $5,000 - $400
Proceeds = $4,600
Therefore, the amount of the discount is $400, and the proceeds (loan amount received by Juan-Solez) are $4,600.