Derek Lee Inc

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					Derek Lee Inc. Loans money to John Kruk Corporation in the amount of $600,000. Lee
accepts 8% note due in 7 years with interest payable semiannually. After 2 years (and
receipt of interest for 2 years). Lee needs money and therefore sells the note to Chicago
National Bank, While demands interest on the note of 10% compounded semiannually.
What is the amount lee will receive on the sale of the note?

The semiannual interest received on the loan at 8% = $600,000 × 4% = $24,000

The amount Lee would receive on the sale of the note is the sum of the PV of interest
payments and the PV of the $600,000 principal. Both would be discounted at an
interest rate of 5% for 10 periods (Since interest is compounded semi annually, then
interest = 10% ÷ 2 = 5%. Number of periods = 5 (years) × 2 = 10 periods)

                                              1
                                      1
                                           (1.05)10                     1
Amount to be received = ($24, 000                  )  ($600, 000           )
                                           0.05                      (1.05)10

= $553,670*

*The check figure in the book is $$553,667.52, the difference is due to rounding
errors

				
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