[jjiang]

Becker Question –

A sold to K a $20k, 8% 5-yr note that required five equal annual year end payments. This note was discounted to yield a 9% to K. The PV factors of an ordinary annuity of $1 for 5 periods are:

8% 3.992

9% 3.890

What should be the total interest revenue earned by K on this note.

A. 8,000

B. 5,560

C. 5,050

D. 9,000

The correct answer is B 5,560

Annual pmnts = 20,000/3.992=5,010

Total pmnts=5,010*5=25,050

Discounted note=5,010*3.89=14,490

Difference 25,050-14,490=5,560

From my understanding, A is going to pay K an annual payment of 5,010, which includes both principal and interest (kinda like bonds). The beginning carrying amount of the note is 14,490 (which is the face minus the discount @9%) and total cash receive in the end will be 5,010*5=25,050. Therefore the difference goes to total interest revenue.

Is that correct? Or am I still understanding it wrong. This question has been haunting me for a whole day at work today. lol.

Thanks!

[jonnyp]

Hey I've been taking a look at your question, and a couple of things don't seem to add up.

Your multiplication of 5,010 x 3.89 comes out to 14,490? My calc comes to 19,489

Also, your subtraction of 25,050-14,490=5560? My calc comes to 10,560.

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[JHamB]

Hi everyone,

The initial analysis is correct with the exception of the discounted note result. It should be 19,489, which when subtracted from the total cash payments of 25,050, the interest portion remains at 5,561 (rounding difference)

[Author]

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