Question

On June 1, 2018, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $480,000 and a discount rate of 9%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2018? (Round all calculations to the nearest whole dollar amount.)

Answer 1

Answer:

Ans. the carrying value of the note as of September 30, 2018 is $404,006

Explanation:

Hi, the note was issued to mature in 6 months, and 4 months had passed, therefore there are still 2 months left for the note to mature, in other words, this works just as a non-coupon bond which you price in terms of its discount rate and the time remaining for this instrument to mature.

With that in mind, what we need to do is to find the time remaining for the bond to mature, so remember that it was issued on June,1 2018, and in order to facilitate our calculations, we say: "From June 1 to June 30, there is a month..." Now our date will match its maturity, so we just count months until September 30 and we found out that the result is 4 months, it means that this note has 2 months until it matures.

The formula to use is as follows.

$Value(Sep.2018)=\frac{IssuingValue}{(1+Disc.Rate)^{n} }$

Where n is the months to its maturity.

Everything should look like this:

$Value(Sep.2018)=\frac{480,000}{(1+0.09)^{2} }=404,006$

Best of luck.