A sum of $5000 is due in 2 years. What is the bankers discount at the rate of 10

A sum of $5000 is due in 2 years. What is the bankers discount at the rate of 10%?

A sum of $5000 is due in 2 years. What is the bankers discount at the rate of 10%?

Correct Answer: $867.77

Step 1: Identify the total amount due in the future, which is $5000.
Step 2: Identify the interest rate, which is 10%.
Step 3: Identify the time period until the amount is due, which is 2 years.
Step 4: Calculate the Bankers Discount using the formula: Bankers Discount = (Principal × Rate × Time) / 100.
Step 5: Substitute the values into the formula: Bankers Discount = (5000 × 10 × 2) / 100.
Step 6: Calculate the result: Bankers Discount = 100000 / 100 = $1000.
Step 7: Calculate the Present Value using the formula: Present Value = Principal / (1 + Rate)^Time.
Step 8: Substitute the values into the formula: Present Value = 5000 / (1 + 0.10)^2.
Step 9: Calculate (1 + 0.10)^2 = 1.21.
Step 10: Now calculate Present Value = 5000 / 1.21 = $4132.23.
Step 11: Finally, calculate the Bankers Discount by subtracting Present Value from the total amount due: Bankers Discount = 5000 - 4132.23.
Step 12: Calculate the result: Bankers Discount = $867.77.

Bankers Discount – The difference between the future value of a sum and its present value, calculated using a specific interest rate.
Present Value Calculation – The process of determining the current worth of a sum that is to be received in the future, discounted at a specific interest rate.