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Basic Question 1 of 2

Synergy Company discounts a 7%, 90-day note receivable at the bank prior to the note's maturity date. The bank's interest rate is 7.75%. Which one of the following describes the cash proceeds that Synergy will receive from the bank on the discount date? They will be ______.

I. equal to the discounted present value of the note
II. equal to the maturity value of the note
III. less than the interest expense charged by the bank
IV. less than the face amount of the note

User Contributed Comments 7

User Comment
kalps Since the bank's interest rate is higher than the notes receivable's rate, the bank will give an amount that is less than the face value to the company. It is equal to the discounted present value of the note: the cash flows of the note are interest (at 7%) + principal. Therefore I and IV are both correct.
examinee What about accumulated interest on the note? No where does it say when it was discounted. So how can we say that the value received will be less than the face value.
danlan Since the interest rate 7.75% is higher than the coupon rate 7%, it's discounted.
noonah Answer I is incorrect, in my view. The discounted PV of the note refers to the 7%. When the note was discounted at the bank at 7.75% the new PV is even less. Both PV's are, of course, less than face value.
o123 but I think I is correct, and IV is the after thought
zkhan87 noonah, the pv of the note is discounted by the mkt rate not the cpn...
Shaan23 We're not talking about coupon rates and stuff here. We have a new market rate of 7.75% which is the redemption rate. When discounting at this rate the PV is lower then what we would receive if we held til maturity using 7%.
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