On May 15, Maynard Co. borrowed cash from Texas Bank by issuing a 120-day note with a face amount of $36,000. Assume a 360-day year. Required: a. Determine the proceeds of the note, assuming the note carries an interest rate of 9%. $ b. Determine the proceeds of the note, assuming the note is discounted at 9%. $

a. The proceed of the note carrying an interest rate of 9%: $36,000;

b. The proceeds of the note, assuming the note is discounted at 9%: $34,951.46.

Explanation:

a.

In case the note carries an interest rate, at the maturity, the borrower has to repay the face value plus the interest rate which is calculated as face value * interest rate * day of note outstanding/360.

Thus, interest rate is separated from face value, proceed of the note is equal to its face amount which is $36,000.

b.

In case the note does not carry interest rate, the borrower will be received an amount less than note's face value and repaid face value at maturity. The difference is the implied interest rate (or discounted rate).

Thus, we have the face value of the note is calculated as:

36,000 / (1 + 9% * 120/360) = 36,000/1.03 = $34,951.46.