70 Chapter 2 Simple Discount
- The Gorham Widget Corporation will receive a payment of $1.8 million (i.e. $1,800,000) for a large order 3 months
from now. Unfortunately, in order to cover the costs of producing the items ordered, Gorham needs to get its hands
on the money sooner. If a fi nance company offers make a loan to them at a simple discount rate of 9.5%, how much
could Gorham borrow against this payment? If another fi nance company offers them a loan at a simple interest rate of
9.63%, would Gorham be better off taking that?
Justify your answer.
- My tax preparer offered to give me $1,249.35 up front in exchange for my tax refund of $1,295, which I expect to
receive in 45 days. What is the amount of discount for this offer? - My tax preparer offered to give me $1,249.35 up front in exchange for my tax refund of $1,295, which I expect to
receive in 45 days. I want to use this money to buy a new refrigerator. If I buy the refrigerator on my credit card, I will
pay a simple interest rate of 21.99%. How does the simple interest rate my tax preparer is offering me compare to the
rate on my credit card?
F. Additional Exercises
- Wilson borrowed $14,357 for 100 days at 15% simple interest. If we looked at this loan as simple discount instead,
what would the simple discount rate be? - There is an error in this table of T bill rates. For one of the maturities, an editor accidentally switched the interest and
discount rates. Which maturity had its rates switched?
U.S. TREASURY BILL CURRENT MARKET RATES
Maturity Date Discount Rate Interest Rate
4/30/07 5.55% 5.60%
5/31/07 5.57% 5.65%
6/30/07 5.62% 5.72%
7/31/07 5.80% 5.66%
8/30/07 5.82% 5.94%- Determine the equivalent simple interest rate for a 2-year simple discount loan, assuming a maturity value of $1,000
and a simple discount rate of 25%. - Determine the equivalent simple interest rate for a 5-year simple discount loan, assuming a maturity value of $5,000
and a simple discount rate of 18%. - Suppose that a $10,000 maturity value note is discounted with a simple discount rate of 6%. Determine the equivalent
simple interest rate assuming that the term is (a) 1 month, (b) 3 months, (c) 6 months, (d) 1 year. Is there anything that
someone might fi nd surprising about these answers?