Simple interest

Question

Ryan knows that he will be receiving $50,000 to settle and insurance claim, but he will not actually be paid for another 2 months. Needing cash now, he is considering an offer from a finance company to buy this payment from him by paying him cash today. The simple discount rate they are offering his is 33%. How much would he receive if he takes the deal?

Answer 1

Normally the bank discounts the maturity value of the settlement at the annual interest rate. But here it is not clear if the bank is simply discounting the $50,000 at the full 33% If the discount is simply 33%, then the offer is to pay

 

$50,000 / 1.33 = $37,593.98

 

The above computation reflects an annual interest rate of 198% (.33 * 6 = 1.98).

The normal computation is:

 

Maturity value                  $50,000.00

Less 50,000 * .33 * 2/12         785.71

 

Proceeds                        $49,214.29