Tremezzo Homes Limited draws a promissory note with a face value of $230,000 and a maturity of 90 days. The note can be discounted for $226,646.86. What is the annual interest rate earned by the holder of the note (assuming that the holder of the note will keep the note until maturity)?

A.

2%

B.

6%

C.

3.65%

D.

14.80%

E.

Cannot be determined with the information provided.

To find the annual interest rate earned by the holder of the promissory note, we can calculate the **annualized discount rate**.

The formula to calculate the discount rate for a note is:

\[
\text{Discount Rate} = \frac{\text{Face Value} - \text{Discounted Value}}{\text{Face Value}}
\]

Then, we can annualize the interest rate based on the 90-day period using the formula:

\[
\text{Annual Interest Rate} = \left(\frac{\text{Discount Rate}}{\text{Number of Days}}\right) \times 365
\]

Where:
- Face Value = $230,000
- Discounted Value = $226,646.86
- Days to maturity = 90

Let's calculate the annual interest rate.# Given values
face_value = 230000        # Face value of the promissory note
discounted_value = 226646.86 # Discounted value of the note
days_to_maturity = 90       # Maturity period in days

# Calculate the discount rate for the 90 days
discount_rate = (face_value - discounted_value) / face_value

# Annualize the interest rate
annual_interest_rate = (discount_rate / days_to_maturity) * 365

# Convert to percentage for readability
annual_interest_rate_percent = annual_interest_rate * 100

annual_interest_rate_percentThe annual interest rate earned by the holder of the note is approximately **5.91%**.

However, this value does not match any of the provided options exactly. The closest reasonable match among the given choices would be **6%** (option B).

Would you like further clarification or details?

Here are five related questions:
1. How is the annual interest rate affected by changes in the discount period?
2. What is the difference between a discount rate and an interest rate?
3. How would the calculations change if the note had a longer maturity period?
4. What are some common uses for promissory notes in business finance?
5. How can a company use promissory notes to manage short-term funding needs?

**Tip:** When dealing with financial instruments like promissory notes, always annualize short-term rates for accurate comparisons.

Learn how to calculate the annual interest rate earned on a promissory note with a face value of $230,000 and a discounted value of $226,646.86. Understand the discount rate formula and the process of annualizing interest rates for financial instruments. Suitable for adult learners and professionals.

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