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Example 7 Discounting a Note at a Bank
Facts: Jordan Corporation has a $40,000, 90-days note from a customer dated September 30, Year 3, due December 30, Year 3, and bearing interest at 12%.
On October 30, Year 3 (30 days after issue), Jordan Corporation takes the note to its bank, which is wiling to discount it at a 15% rate. The note was paid by Jordan’s customer at maturity on December 30, Year 3 (60 days later).
Required: Compute the amount to be paid by the bank for the note. Determine the amount that Jordan Corporation should report as net interest income from the note.
2. Calculate the bank discount on the payoff value at maturity, as follows:
15% discount * 60/360 days * $41,200 = $1,030
Please let me know why do we use the maturity value 41,200?
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