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Paper A style · Interest rates · Straightforward · 6 marks

A finance company buys a promissory note that will pay £25,000 in exactly one year. It pays £23,850 for the note today.

(i)
Calculate the effective annual rate of discount earned by the company, as a percentage to 4 decimal places.
1 mark
Your answer
(ii)
Calculate the effective annual rate of interest earned, as a percentage to 4 decimal places.
1 mark
Your answer
(iii)
Explain by general reasoning why $d$ $= iv$ , where $v$ $= 1/(1+i)$ , and verify that your answers to (i) and (ii) satisfy this relationship.
2 marks
(iv)
The company's alternative is to lend at an effective rate of interest of 4.9% a year. Calculate the maximum price it should pay for the note, to the nearest penny, and comment on whether the purchase at £23,850 is attractive.
2 marks
Your answer

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