Promissory & Discount Notes Test Bank Ch.17

Chapter 17

Promissory Notes, Simple Discount Notes, and the Discount Process

True/False Questions
 

1. A promissory note is always an oral promise. 
True    False

2. The principal of a promissory note is the face value. 
True    False

3. The payee of a promissory note is extending the credit. 
True    False

4. The rate on a promissory note is always stated as a semiannual rate. 
True    False

5. The maker of a promissory note issues the note. 
True    False

6. The maturity date of a promissory note represents when only the principal is due. 
True    False

7. A Treasury bill must be 13 weeks. 
True    False

8. All interest-bearing notes must have the rate stated on the note. 
True    False

9. The maturity value of a non-interest-bearing note is the same as its face value. 
True    False

10. Banks can never deduct interest in advance on a loan. 
True    False

11. A simple discount note does not involve a bank discount. 
True    False

12. Proceeds of a simple discount note equals amount borrowed minus bank discount. 
True    False

13. Bank discount on a simple discount note is based on the amount a borrower receives and not what he or she pays back. 
True    False

14. A simple discount note results in a higher interest rate (effective rate) than a simple interest note. 
True    False

15. The purchase price (or proceeds) of a Treasury bill would be the value of the Treasury bill plus the discount. 
True    False

16. An interest-bearing note can be discounted before the maturity date. 
True    False

17. The maturity value of an interest-bearing note is principal minus interest. 
True    False

18. The discount period represents the exact number of days the original lender will have to wait for the note to come due. 
True    False

19. The calculation of the bank discount when discounting an interest-bearing note uses maturity value. 
True    False

20. Proceeds from discounting an interest-bearing note is the principal minus the bank discount. 
True    False

21. Lines of credit provide companies with additional financing that is immediately available to them. 
True    False

Multiple Choice Questions
 

22. A promissory note: 
A. Is an oral promise
B. Is a conditional promise
C. Has a fixed time
D. Has a variable time in the future to be paid
E. None of these

23. The maker of a promissory note: 
A. Issues the note
B. Never borrows the money
C. Extends the credit
D. Issues the note and extends credit
E. None of these

24. To calculate Time, Interest is divided by Principal times: 
A. Amount of the note
B. Discount
C. Face value
D. Rate
E. None of these

25. A simple discount note results in: 
A. Lower interest costs than a simple interest note
B. Same interest costs as a simple interest note
C. Interest deducted when note is paid back
D. Interest deducted in advance
E. None of these

26. The maturity value of a $16,000 non-interest-bearing, simple discount 6%, 60-day note is: 
A. $16,160
B. $16,000
C. $16,610
D. $16,600
E. None of these

27. The bank discount of an $18,000 non-interest-bearing, simple discount 8%, 90-day note is: 
A. $18,360
B. $17,640
C. $630
D. $360
E. None of these

28. The rate on a $1,200, 90 day note that cost $17.75 in interest is: 
A. 5%
B. 6%
C. 7%
D. 5.14%
E. None of these

29. The effective rate of a $25,000 non-interest-bearing simple discount 10% 90-day note is: 
A. 10.62%
B. 10%
C. 10.8%
D. 10.26%
E. None of these

30. The maturity value of an interest-bearing note is: 
A. Principal – interest
B. Principal + proceeds
C. Principal + interest
D. Principal – bank discount
E. None of these

31. In discounting an interest-bearing note, the discount period represents: 
A.  Maturity date
B. Date of original note
C. Number of days from date of discount to date of maturity
D. Number of days from date of original note to date of maturity
E. None of these

32. In calculating the bank discount when discounting an interest-bearing note, which one of the following is not used in the calculation? 
A. Principal proceeds
B. Maturity value
C. Bank discount rate
D. Discount period
E. None of these

33. If one discounts a non-interest-bearing note, all the following will be used except: 
A. Principal + interest
B. Discount rate
C. Discount period
D. Face value of the note
E. None of these

34. A $7,000, 4%, 120-day note dated March 20 is discounted on July 15. Assuming a 3% discount rate, the bank discount is: 
A. $1.74
B. $1.77
C. $7.11
D. $17.68
E. None of these

35. A $15,000, 11%, 120-day note dated Sept. 3 is discounted on Nov. 11. Assuming a bank discount rate of 9%, the proceeds would be: 
A. $15,550.00
B. $15,351.74
C. $15,531.74
D. $15,135.47
E. None of these

36. A $120,000, 5%, 200-day note dated June 6 is discounted on October 8. The discount period is: 
A. 124 days
B. 76 days
C. 142 days
D. 67 days
E. None of these

37. A $15,000, 6%, 50-day note dated November 8 is discounted at 5% on November 28. The proceeds of the note would be: 
A. $14,936.46
B. $15,610.64
C. $63.54
D. $15,061.98
E. None of these

38. A $25,000, 15%, 80-day note dated November 5 is discounted at National Bank on January 5. The discount period is: 
A. 80 days
B. 19 days
C. 61 days
D. 91 days
E. None of these

39. The maturity value of a $20,000, 7%, 75-day interest-bearing note dated September 10 is: 
A. $22,912.67
B. $20,291.67
C. $21,029.67
D. $22,219.76
E. None of these

40. J. Ryan discounts an 80-day note for $15,000 at 12%. The bank discount is (assume ordinary interest): 
A. $14,600
B. $15,400
C. $400
D. $15,000
E. None of these

41. B. Blue discounts a 90-day note for $20,000 at 4%. The bank discount is (assume ordinary interest): 
A. $20,200
B. $19,800
C. $200
D. $2,000
E. None of these

42. Jay discounts a 100-day note for $25,000 at 13%. The effective rate of interest to the nearest hundredth percent is: 
A. 13.48%
B. 13.49%
C. 13.02%
D. 13.03%
E. None of these

43. Jill Corporation accepted a $16,000 note on Aug. 12. Terms of the note were 13% for 100 days. Jill discounted the note on September 28 at the Reno Bank at 14%. The proceeds to Jill would be: 
A. $341.69
B. $16,236.09
C. $303.00
D. $16,277.78
E. None of these

44. Jill Jones borrowed $18,000 for 180 days from Sovereign Bank. The bank discounts the note at 8%. The effective interest rate to the nearest hundredth percent is: 
A. 8.33%
B. 8.32%
C. 8.23%
D. 8.31%
E. None of these

45. On March 12, Bill Jones accepted a $12,000 note in granting a time extension of a bill for goods purchased by Ron Prentice. Terms of the note were 13% for 90 days. On April 24, Bill could no longer wait for the money and discounted the note at Able Bank at a discount rate of 14%. The proceeds to Bill is: 
A. $12,047.90
B. $12,163.54
C. $12,390.00
D. $12,048.90
E. None of these

46. Ray Furniture wants to buy a dining room set for $7,000 with a 20% trade discount. Ray needs the cash to pay the bill and is considering discounting a 90-day note dated May 12 with a maturity value of $6,500 at Hunt Bank at a discount rate of 13% on June 5. The bank discount if Ray discounts the note is: 
A. $211.25
B. $1,400
C. $154.92
D. $212.15
E. None of these

47. On June 30 Rose Company accepted a 90-day, $12,000 non-interest-bearing note from C Manufacturer. The maturity value of the note for Rose is: 
A. $11,500
B. $11,800
C. $11,900
D. $11,950
E. None of these

48. Shelley Corporation discounted a $7,000, 90-day note dated June 18 at the Sunshine Bank on July 18 at a discount rate of 12%. (Assume the $7,000 is the maturity value.) The amount of bank discount is: 
A. $70
B. $210
C. $140
D. $240
E. None of these

49. Ralph Corporation accepted a $15,000, 11%, 120-day note dated August 19 from Jay Company in settlement of a past bill. On October 20, Ralph Corporation decided to discount the note at a discount rate of 12%. The proceeds to Ralph Corporation is: 
A. $1,517.97
B. $1,517.79
C. $15,249.73
D. $15,249.37
E. None of these

50. On April 12, Dr. Rowan accepted a $10,000, 60-day, 11% note from Bill Moss granting a time extension on a past-due account. Dr. Rowan discounted the note at the bank at 12% on May 13. The bank discount is: 
A. $98.44
B. $111.94
C. $94.48
D. $111.49
E. None of these

51. An 8% 13-week Treasury bill would have an effective interest rate of (to the nearest hundredth percent)? Assume it is a $10,000 Treasury bill. 
A. 8.20%
B. 8.16%
C. 8.17%
D. 9.00%
E. None of these

52.  The bank discounts an $8,750 non-interest-bearing simple discount note at 6% for 60 days. What is the discounted amount?

A. $8.75

B. $78.50

C. $86.30

D. $87.50

E. None of these

53. The maturity value of a $28,000, 6%, 60-day interest-bearing note on August 6 is:

A. $28,276.16

B. $28,140

C. $28,280

D. $22,800

E. None of these

54. United Missouri Bank discounts a 120-day note for $60,000 at 6.75%. It uses 360 days in a year. What is the bank discount?

A. $1,200

B. $1,350

C. $1,250

D. $61,200

E. None of these

55. Justin discounts a 115-day note for $26,000 at 8.5%. The effective rate of interest to the nearest tenth percent is:

A. .8%

B. .87%

C. 8.5%

D. 8.7%

E. None of these

56. Tiffany purchased a $10,000, 13-week Treasury bill that is paying 2.25%. What is the effective rate on this T-bill?

A. 2.2%

B. 2.7%

C. 2.26%

D. 2.0%

E. None of these

Short Answer Questions
 

57. 1. Bank discount
2. Bank discount rate
3. Discount period
4. Effective rate
5. Face value
6. Interest-bearing note
7. Line of credit
8. Maker
9. Maturity date
10. Maturity value
11. Proceeds
12. Promissory note
13. Simple discount note
A. True rate of interest
B. Ability to borrow quickly
C. The principal
D. Due date
E. Amount bank charges in the discounting process
F. Bank deducts interest in advance
G. Maturity value greater than original note
H. Cash paid on due date
I. Rate bank charges in the discounting process
J. Signs the note
K. Number of days bank will wait for its money in the discount process
L. Maturity value minus bank discount
M. A written promise 

58. Compute (A) bank discount, (B) proceeds for the following simple discount (use ordinary interest), and (C) the effective interest rate to nearest hundredth percent:
  
A. _____________
B. _____________
C. _____________ 

59. Calculate the rate on a $2,500 note for 120 days that costs $98.63 in interest. 

60. Complete the following for this interest-bearing note that is discounted at 11%. (Use 360 days.)
  
A. _______________
B. _______________
C. _______________ 

61. Complete the following for this interest-bearing note that is discounted at 11%. (Use 360 days.)
  
A. _____________
B. _____________
C. _____________ 

62. Juan-Solez, a prominent painter, takes out a simple discount note for one year from River National Bank for $5,000. The annual rate of interest is 8%. What is the amount of:
A. Bank discount
B. Proceeds
C. Effective rate of interest (to nearest tenth percent) 

63. Mobilee Oil Company accepted a $10,000, 120-day note dated March 3 at 8½% to settle a past-due account receivable. Mobilee Oil discounted the note to raise cash on May 10 at a discounted rate of 9%. What proceeds did Mobilee Oil receive? Use ordinary interest. 

64. On May 12, Bob Campbell accepted a $5,000 note in granting a time extension of a bill for goods bought by Rick Ween. Terms of the note were 8% for 120 days. On July 8, Bob needed to raise cash and discounted the note at Rick's bank at a discount rate of 9%. Calculate Bob's proceeds. Use ordinary interest. 

65. How long was a $10,000 8.5% note that cost $232.87 in interest outstanding? 

66. The face value of a single discount note is $12,000. The discount is 6 1/2% for 90 days. Use ordinary interest. Calculate the following:
A. Amount of interest charged for each note
B. Amount borrower would receive
C. Amount payee would receive at maturity.
D. Effective rate (to the nearest tenth percent) 

67. On July 18, Aui Lester accepted a $15,000, 7 3/4%, 180-day note from Ryan O'Flynn. On October 5, Aui discounted the note at Brome Bank at 8 1/4%. What proceeds did Aui receive? Use ordinary interest. 

68. Jone Corporation accepted a $25,000, 8%, 120-day note on July 8. Jone discounted the note on September 4 at Rool Bank at 7%. What proceeds did Jone receive? Use ordinary interest. 

69. Wayne Night signed a $10,000 note at Lynn Bank that charges a 7% discount rate. Use ordinary interest. If the loan is for 150 days, find:
A. Proceeds
B. Effective rate charges by the bank (to the nearest tenth percent) 

70. Compute bank discount using (A) ordinary interest, (B) proceeds, and (C) effective interest rate to the nearest hundredth. Do not round the denominator in your calculation.
   

71. Compute bank discount using (A) ordinary interest, (B) proceeds, and (C) effective interest rate to the nearest hundredth. Do not round the denominator in your calculation.
   

72. Calculate Principal for a 8.5%, 120 note that cost $209.59 in interest.  
 

73. Calculate maturity value for the interest-bearing note using ordinary interest:
   

74. Use ordinary interest:
   

75. Use ordinary interest:
   

76. Use ordinary interest:
   

77. Use ordinary interest:
   

78. On May 1, the Morse Company accepted a 60-day, $15,000 non-interest-bearing note from U Corporation. What is the maturity value of the note? 

79. Abe Corp. discounted a 120-day note with a maturity value of $8,000 dated June 8 at the Village Bank on Sept. 2 at a discount rate of 9%. Use ordinary interest. How much did Abe receive? 

80. The face value of a simple discount note is $4,000. The bank discount is calculated at 12% for 60 days. Use ordinary interest. Calculate:
A. Amount of interest charged for note
B. Amount borrower would receive
C. Amount payee would receive at maturity
D. Effective rate.

81. On May 12, Joy Co. accepted a $1,000, 60-day, 6% note from Abe Wills, granting a time extension on a past-due account. Joy discounted the note at the bank at 9% on May 28. Use ordinary interest. Calculate Joy's proceeds. 

82. On May 7, Ralph Blue accepted a $5,000 note from Dick Shea. Terms of the note were 7% for 180 days. On Aug. 19, Ralph could no longer wait for the money and discounted the note at Tover Bank at a discount rate of 8%. Calculate Ralph's proceeds. Use ordinary interest. 

83. Moris Bank discounts a 100-day note for $6,000 at 11%. Find (A) bank discount and (B) proceeds. Use ordinary interest. 

84. Alfred Corp. accepted a $12,000 note on July 15 with terms of 14% for 60 days. Alfred discounted the note on July 28 at the Victory Bank at 10%. What proceeds did Alfred receive? Use ordinary interest. 

85. Mover Co. discounted a $2,000, 60-day note dated June 4 at Gloria Bank on June 20 at a discount rate of 9%. Use ordinary interest. How much did Mover Co. receive? 

86. Able Co. accepted a $20,000 note on March 10 with terms of 6%, 60 days. Able Co. discounted the note on March 20 at the Green Bank at 7%. Use ordinary interest. What net proceeds did Able receive? 

87. On October 15, Daniel Miller accepted a $5,000, 60-day, 8% note from Bill Boyer granting a time extension on a past-due amount. Daniel discounted the note at Volve Bank at 9% on Oct. 26. Use ordinary interest. Calculate Daniel's proceeds. 

88. Lois Longin buys a $10,000 13-week Treasury bill at 11%. Use ordinary interest. What is her effective rate to nearest hundredth percent? 

89. Molly Lenny bought a $10,000 13-week Treasury bill at 13%. What is her effective rate? Use ordinary interest. Round to nearest hundredth percent. 

90. Calculate the maturity value for an interest-bearing note of $28,500 for 118 days at 8%:

91. Mark Price, the owner of Biggie’s Restaurant, took a simple discount note for two years from PNC Bank for renovations. His loan was for $10,000 at a 6% discount rate. Calculate (A) bank discount, (B) proceeds, (C) effective rate to the nearest tenth.

92. Shelley Ann signed a $20,000 note for 120 days at Concord Bank that charges a 5.5% discount rate. What are Shelley’s discount and her proceeds?

93. Lisa Davidson signed a $12,000 note from Springfield National Bank at a 5% discount for 222 days (assume 360 days). Calculate the bank discount.

94. Calculate the maturity value for a note at $51,000 for 62 days, at 5% (use 360 days).
 
 

95. Calculate the maturity value for a note at $61,000 for 62 days at 5% (use 360 days).