A company issued an interest bearing promissory note for $100,000 that matures in 10 years and pays interest semi-annually @ 5%. The company wishes to replace this one note with two promissory notes for $50,000 each with the same interest rate of 5% payable semi-annually. One note mature in 5 years and the second in 7 years. What is the cost or savings to the company in this transaction? Thanks for help.
This is as straightforward as it looks. The company is simply trying to save money by shortening the term of the original note of $100,000. So, the savings would be:
$100,000 x 5%/2 x (10 x 2) =$50,000 - interest that the co. would pay in 10 yeras.
$50,000 x 5%/2 x (5 x 2) =$12,500 - interest that the co. would pay in 5 years.
$50,000 x 5%/2 x (7 x 2) =$17,500 - interest that the co. would pay in 7 years.
Therefore, the savings to the company would be:
$50,000 - [$12,500+$17,500] =$20,000 - total savings to the company.
