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When a $40,000, 90-day, 9% interest -bearing note payable matures, total payment will...

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rosey84 | Student, College Freshman | eNotes Newbie

Posted November 20, 2010 at 5:53 AM via web

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When a $40,000, 90-day, 9% interest -bearing note payable matures, total payment will amount to:

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted November 20, 2010 at 1:14 PM (Answer #1)

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Before I answer this question, I would like to clarify some of the assumptions that we need to make.

We assume that the interest of 9% is simple interest per year. This is because generally there is no compounding of interest over a short period like 90 days. The interest on part of an year can be calculated on a daily basis with a year considered to be 365 days long. Alternatively, the interest may also be calculated on some other basis such as monthly or quarterly. Usually, in bonds of high value and when the duration is specified in days the interest is calculated on daily basis. So we will assume that this is the applicable method in this case.

Coming to solving the question:

Interest = (Principal amount)*(Interest rate/100)*(Term of note)/365

Substituting the given values in the above equation:

Interest = 40000*(9/100)*(90/365) = 887.67

Total Payment = Principle + Interest = 40000 + 887.67 = 40887.67


Total payment on maturity = $40887.67

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