Secondary Sales: The Bond Market
Roger loaned Rafael for 120 days at simple interest. 7 Numeric 1 point
30 days later he sold the note to Novak, at an simple discount
rate.

When Roger loaned the money to Rafael, he expected to earn simple interest, which is calculated as . For his loan of at a interest rate for 120 days (or year), he would earn . So, Rafael will owe Roger at the end of the term.

When Roger sold the note to Novak after 30 days, he had to calculate the remaining amount Rafael owed after days. He could use the formula for simple interest again to find that Rafael would owe ; however, the discount rate means Novak pays the present value of the note at for the remaining days. Calculating this gives:

Present Value → .

This means Roger sold the note to Novak for about . A savvy move in the secondary market!

If you’re looking to dive deeper into the world of bonds and secondary sales, remember that it’s about timing and rates. High interest rates might seem appealing but can lower the present value of your note. Keep an eye on market trends and learn the nuances of discount versus interest rates; each plays a role in the value and profitability of financial instruments you may be buying or selling!