Module 2

SIMPLE DISCOUNT

Overview:
A discount is a deduction from the maturity value of an obligation made when the obligation
is sold before its maturity date.

Module Objectives:

After a successful completion of this module, you should be able to:

 Define and illustrate the basic terms of simple discount;

 Compare simple interest and simple discount;
 Enumerate the rules in solving proceeds at simple discount and rates; and
 Solve for maturity value at simple discount equivalent rates, partial payments, and
instalments.

Course Materials:

Let D be the discount interest, F be the maturity value of the obligation, d be the discount
rate and t be the term of the loan. The discount interest is defined by 𝐷 = 𝐹𝑑𝑡

The discount rate for a given period of time is the ratio of the discount for the period to the
maturity value. The discount rate is also quoted annually.

Examples:

1. If P60, 000 is discount at 16.5% discount interest for 8 months, find the discount.

8 2
Solution: 𝐹 = 𝑃60, 000; 𝑑 = 16.5%; 𝑡 = 8 𝑚𝑜𝑛𝑡ℎ𝑠 = = 𝑦𝑒𝑎𝑟
12 3

To find the discount,

2
𝐷 = 𝐹𝑑𝑡 = 𝑃60,000 × 0.165 × = 𝑃6,600
3
 2. Find the discount interest on P50, 000 for 50 days at 9.4% discount interest.

50 5
Solution: 𝐹 = 𝑃50,000; 𝑑 = 9.4%; 𝑡 = 50 𝑑𝑎𝑦𝑠 = =
360 36

To find the discount,

5
𝐷 = 𝐹𝑑𝑡 = 𝑃50,000 × 0.094 × = 𝑃652.78
36

Derived Formulas

Other formulas can be derived from the discount formula 𝐷 = 𝐹𝑑𝑡. If the rate and time is
𝐷
given and the maturity value is unknown, divide by 𝐷 = 𝐹𝑑𝑡 to have 𝐹 = .
𝑑𝑡

When the maturity value and the time are known and the discount rate is unknown, divide
𝐷
𝐷 = 𝐹𝑑𝑡 by 𝐹𝑡 to have 𝑑 = .
𝐹𝑡

And to find the time and the maturity value and the discount rate are given, divide 𝐷 = 𝐹𝑑𝑡
𝐷
by 𝐹𝑑 to have 𝑡 = .
𝐹𝑑

Examples:

1. Find the maturity value due in 6 months discounted at 8.4% whose discount interest is P4,
200.

1
Solution: 𝐷 = 𝑃4, 200; 𝑑 = 8.4%; 𝑡 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 = 𝑦𝑒𝑎𝑟
2

To find the maturity value,

𝐷 𝑃4,200
𝐹= = 1 = 𝑃100,000
𝑑𝑡 0.84(2)

2. Find the discount rate on P78, 000 if the interest is P4, 680 discounted for 120 days.

120 1
Solution: 𝐹 = 𝑃78,000; 𝐷 = 𝑃4,680; 𝑡= 𝑦𝑒𝑎𝑟 = 𝑦𝑒𝑎𝑟
360 3
 To find the discount rate,
𝐷 𝑃4,680
𝑑= = 1 = 0.18 = 18%
𝐹𝑡 𝑃78,000(3)

Proceeds at Simple Discount

If the holder of the note needs cash before the maturity date he may sell the note to a
bank. The bank will discount maturity value at a discount rate. The bank will take a certain
percentage of the maturity value as its charge and will give the balance to the seller. This balance
is called the proceeds.

The proceeds is computed by the following formulas;

𝑃 =𝐹−𝐷

𝑃 = 𝐹 − 𝐹𝑑𝑡

𝑃 = 𝐹(1 − 𝑑𝑡)

Examples:

1. Discount P28, 000 for 9 months at a discount rate of 20.4% p.a.

9 3
Solution: 𝐹 = 𝑃28,000; 𝑑 = 20.4%; 𝑡= 𝑦𝑒𝑎𝑟 = 𝑦𝑒𝑎𝑟
12 4

To find the discount,

3
𝐷 = 𝐹𝑑𝑡 = 𝑃28,000 × 0.204 × = 𝑃4,284
4

2. At 16% discount rate, find the present value of P36, 000 which is due at the end of 90
days? What is the discount?

90 1
Solution: 𝐹 = 𝑃36,000; 𝑑 = 16%; 𝑡 = 90 𝑑𝑎𝑦𝑠 = 𝑦𝑒𝑎𝑟 = 𝑦𝑒𝑎𝑟
360 4

To find the present value,

1
𝑃 = 𝐹(1 − 𝑑𝑡) = 𝑃36,000 (1 − 0.16 ( )) = 𝑃34,560
4
 To find the discount,
𝐷 = 𝐹 − 𝑃 = 𝑃36,000 − 𝑃34,560 = 𝑃1,440

3. A bank charges 18% interest in advance (18% bank discount). If Gerome signs a 5-month
note for P40, 000, what sum does he receive from the bank?

5
Solution: 𝐹 = 𝑃40,000, 𝑑 = 0.18, 𝑡 = 5 𝑚𝑜𝑛𝑡ℎ𝑠 = 𝑦𝑒𝑎𝑟
12
5
𝑃 = 𝐹(1 − 𝑑𝑡) = 𝑃40, 000 [1 − (0.18) ( )] = 𝑃40,000(0.925) = 𝑃37,000
12

Maturity Value at Simple Discount

𝑃
The formula for the maturity value at discount interest is 𝐹 =
1−𝑑𝑡

Example:

1. Find the amount due at the end of 1 year and 6 months whose present value is P31, 980
at 12% p.a. interest in advance.

Solution: 𝑃 = 𝑃31, 980; 𝑑 = 12%; 𝑡 = 1 𝑦𝑒𝑎𝑟 𝑎𝑛𝑑 6 𝑚𝑜𝑛𝑡ℎ𝑠 = 1.5 𝑦𝑒𝑎𝑟𝑠

To solve for the maturity value,

𝑃 𝑃31,980 𝑃31,980
𝐹= = = = 𝑃39,000
1 − 𝑑𝑡 1 − 0.12(1.5) 0.82

2. Find the face of a 6- month note which Mr. Nuestro must sign in order to receive P54, 000
from a bank charging 17.4% interest in advance.

1
Solution: 𝐹 = 𝑃54, 000, 𝑑 = 0.174, 𝑡= 𝑦𝑒𝑎𝑟
2
𝑃 𝑃54,000 𝑃54,000
𝐹= = = = 𝑃59,145.67
1 − 𝑑𝑡 1 − (0.174)(1) 0.913
2
Comparing Simple Interest and Simple Discount

Comparing simple interest and simple discount, the use of a discount rate rather than an
interest rate simplifies the computation. Simple discount is also called interest in advance.

Examples:

1. Discount P10, 000 in 1 year at a) simple interest rate of 6%, b) at a bank discount of 6%.

Solution:
a. 𝐹 = 𝑃10,000, 𝑟 = 0.06, 𝑡 = 1 𝑦𝑒𝑎𝑟
𝐹 𝑃10,000
𝑃= = = 𝑃9,433.96
1+𝑟𝑡 1+(0.06)(1)

b. 𝐹 = 𝑃10,000, 𝑑 = 0.06, 𝑡 = 1 𝑦𝑒𝑎𝑟

𝑃 = [1 − 𝑑𝑡] = 𝑃10,000[1 − (0.06)(1)] = 𝑃9,400

Note that the present value at 6% bank discount is P33.96 less than the same maturity
value than if it were based on 6% simple interest rate.

A given bank discount rate results in a larger money return to the lender than the same
simple interest rate. For the reason, bank discount is commonly used to discount sums of money
for periods of time of a year or less.

Equivalent Rates

A discount rate and an interest rate are equivalent if the two rates result in the same
present value for an amount due in the future. To get the relationship between r and d, we equate
the present value at simple interest and the present value at simple discount.

𝐹
= 𝐹(1 − 𝑑𝑡)
1 + 𝑟𝑡

Dividing both sides by F, we obtain

1
= (1 − 𝑑𝑡)
1 + 𝑟𝑡
Solving for r, we have

𝑑
𝑟=
1 − 𝑑𝑡

Similarly, the discount rate d at a given interest rate is

𝑟
𝑑=
1 + 𝑟𝑡

Examples:

1. What is the interest rate r equivalent to a discount rate of a) 9% for 2 months; b) 9% for 8
months?

Solution:
1
a. 𝑑 = 0.09, 𝑡 = 𝑦𝑒𝑎𝑟
6
𝑑 0.09
𝑟= = = 0.0914 = 9.14%
1 − 𝑑𝑡 1
1 − (0.09)( )
9
2
b. 𝑑 = 0.09, 𝑡 = 𝑦𝑒𝑎𝑟
3
𝑑 0.09
𝑟= = = 0.0957 = 9.57%
1 − 𝑑𝑡 1 − (0.09) (2)
3
2. At what discount rate should a creditor charge to earn an interest rate of 18% on a 6-
month loan?

1
Solution: 𝑟 = 0.18, 𝑡 = 𝑦𝑒𝑎𝑟
2
𝑟 0.18
𝑑= = = 0.1651 = 16.51%
1 + 𝑟𝑡 1 + (0.18) (1)
2

Promissory Notes

A promissory note is a written promise to pay a certain sum of money on a specified date.
The sum of money due is called the maturity value. The date on which the money is due is called
the maturity date. If the note specifies the rate of interest, it is an interest bearing note. If it does
not indicate any interest, it is a non-interest bearing note.
For a promissory note:

Its term is the period explicitly stated in the note;

Its face is the sum stated in the note;

Its due date or maturity date is the date on which the debt is to be paid;

Its maturity value is the sum to be paid on the maturity date.

Interest Bearing Note:

P40, 000 May 9, 2020

90 day after date, for the value received, the undersigned promises to pay to the
order of Ms. Jane Mesa the sum of Forty Thousand and 00/100 pesos (P40, 000) with interest
from date at a rate of sixteen percent per annum, computed on the basis of three hundred sixty
five (365) days a year and actual days elapsed, payable when the principal is due. Payable in
Oriental Mindoro.

Signed

M.T. Amar

The note was drawn by M.T. Amar (maker of the note) to the order of Ms. Jane Mesa (payee).
The face value of the note is P40, 000. The date of the note is May 9, 2020 and the term of the
note is 90 days. The maturity of the note is 90 days after date, which is August 7, 2020. The
maturity value is computed by

90
𝐹 = 𝑃(1 + 𝑟𝑡) = 𝑃40,000 [1 + (0.16) ( )] = 𝑃41,600
360

If Ms. Jane Mesa sells the note to a Ps Bank on June 8, 2020, the sale is accomplished by
endorsing the note. Suppose the bank charges 18% p.a. discount interest.
To illustrate

30 days 60 days

May 9 June 8 August 7

The maturity value of P41, 600 is due on August 7, 2020. The remaining number of days
from June 8 to August 7 will be the term of the discount which is 60 days. Ps Bank paid Ms. Jane
Mesa the amount of P40, 352, as computed below:

Maturity value of the note - P41, 600

Discount rate 18%

Term of discount 60 days

To compute for the discount interest,

60
𝐷 = 𝐹𝑑𝑡 = 𝑃41,600 × 0.18 × = 𝑃1,248
360

To compute for the proceeds,

𝑃 = 𝐹 − 𝐷 = 𝑃41,600 − 𝑃1,248 = 𝑃40,352

P50, 000 May 22, 2020

Four months after date, for value received, the undersigned promise to pay in the
lawful money of the Philippines to the order of Eden Jean, the principal sum of Fifty thousand and
00/100 pesos.

Signed

Esther Mamador

The face value and the maturity value of the non-interest bearing note is P50, 000.00. The
drawer or the maker of the note is Esther Mamador. The drawee or the payee of the note is Eden
Jean. The term of the note is 4 months and the maturity date is on September 22, 2020.

After 1 month, in need of cash, Eden Jean sold the note to EPCI Bank that charges 21%
p.a.
 30 days 60 days

May 22 June 22 September 22

The remaining months is the term of discount which is 3 months. EPCI Bank paid Eden
Jean the amount of P47, 375, as computed below:

Maturity value of the note P50, 000

Term of the note 3 months

Discount rate 21%

To compute the discount interest,

3
𝐷 = 𝐹𝑑𝑡 = 𝑃50,000 × 0.21 × = 𝑃2,625
12

To compute the proceeds,

𝑃 = 𝐹 − 𝐷 = 𝑃50,000 − 𝑃2,625 = 𝑃47,375

Partial Payments

Debt are sometimes discharge by series of partial payments over the term of the debt
rather by a single payment on the due date. The problem is then of finding the sum due on the
due date when a set of partial payments have been made. The merchant’s Rule will be use here.

Under the Merchant’s Rule, interest is computed on the original debt and each partial
payment to the due date. The required sum due on the due date is the difference between the
amount of the debt and the sum of the amounts of the partial payments. All such problems may
be solved in accordance with the Merchant’s Rule by writing an equation of value with the due
date as focal date.

Example:

A debt of P20, 000 with interest at 8% is due in 1 year. The debtor pays P4, 000 in 5
months and P8, 000 in 9 months. Find the balance due on the due date.
First solution:

Simple interest is computed on the original debt of P20, 000 for 1 year, on the first partial
payment (P4, 000) for 12 − 5 = 7 months, and on the second partial payment (8, 000) for 12 −
9 = 3 months.

Original debt P20, 000.00

Interest for 1 year

P20, 000 x 0.08 x 1 1, 600.00

Amount P21, 600.00

Less:

First partial payment P 4, 000.00

Interest for 7 months

P 4, 000 x 0.08 x 7/12 186.67

Second partial payment 8, 000.00

Interest for 3 months

P 8, 000 x 0.08 x 3/12 160.00

Total deduction P12, 346.67

Sum due on due date P 9, 253.33

Second solution:

Writing an equation of value with the end of 1 year as focal date, we have

P 21, 600

0 P 4, 000 P 8, 000

7 1
𝑥 + 𝑃4,000 [1 + (0.08) ( )] + 𝑃8,000 [1 + (0.08) ( )] = 𝑃20,000[1 + (0.08)(1)]
12 4

𝑥 + 4,186.67 + 8,160 = 21,600

𝑥 = 𝑃21, 600 − 12, 346.67

𝑥 = 𝑃9,253.33
Instalments

In instalment buying, the customer makes a down payment for goods purchased and
agrees to make a stipulated number of weekly or monthly partial payment.

Example:

An entertainment center costing P80, 000 is sold for P30, 000 down and 10 monthly instalment
of P5, 000 plus simple interest at 6% on the unpaid balance.

Solution:

After the down payment. The unpaid balance is P80, 000 – 30, 000 = P50, 000

The first monthly payment is P5, 000 + P50, 000(0.06) (1/12) = P 5, 250

The second monthly payment is P5, 000 + P45, 000 (0.06) (1/12) = P 5, 225

The third monthly payment is P5, 000 + P40, 000 (0.06) (1/12) = P 5, 200

The fourth monthly payment is P5, 000 + P35, 000 (0.06) (1/12) = P 5, 175

The fifth monthly payment is P5, 000 + P30, 000 (0.06) (1/12) = P 5, 150

The sixth monthly payment is P5, 000 + P25, 000 (0.06) (1/12) = P 5, 125

The seventh monthly payment is P5, 000 + P20, 000 (0.06) (1/12) = P 5, 100

The eight monthly payment is P5, 000 + P15, 000 (0.06) (1/12) = P 5, 075

The ninth monthly payment is P5, 000 + P10, 000 (0.06) (1/12) = P 5, 050

The tenth monthly payment is P5, 000 + P5, 000 (0.06) (1/12) = P 5, 025

The total sum paid by the buyer is

𝑆 = 𝑃30,000 + (5,250 + 5,225 + ⋯ + 5,025)

10
= 𝑃30,000 + (5,250 + 5,025)
2

= 𝑃30,000 + 51,375

= 𝑃81,375

The sum in parenthesis being the sum of an arithmetic progression of 10 terms. Thus, the
buyer paid P81, 375 - 80, 000= P1, 375 for the privilege of not paying cash on the date of
purchase.
 Activities/ Assessments

Answer the following questions.

A.

1. What is the simple interest r equivalent to a discount rate of: a) 10% for 3 months? b)

10% for 5 months?, c) 10% for 8 months?

2. What is the simple interest rate equivalent to the discount rate of a) 12% for 4 months?

b) 12% for 9 months?, c) 12% for 10 months?

3. What is the simple interest rate equivalent to the discount rate of a) 11% for 15

months?, b) 11% for 18 months?, c) 11% for 2 ½ years?

4. At what discount rate d should a creditor charge to earn an interest rate 16.5% of a a)

5-month loan?, b) 8-month loan?, c) 9-month loan?

5. At what discount rate should a creditor charge to earn an interest rate 17.2% of a a)

15-month loan?, b) 18-month?, c) 2 ¼ year loan?

B.

1. Discount P45, 000 for 150 days at 16% p.a. a) simple interest, b) discount interest.

2. Discount P60, 000 for 8 months at 17.5% p.a. a) simple interest, b) discount interest.

3. Discount P75, 000 for 2 years at 18% p.a. simple interest, b) discount interest.

4. Find the maturity value of a discount interest of P4, 560 discounted at 15% p.a. for 90

days.

5. What is the term of the discount interest of P80, 000 loan whose discount is P4, 800

charged at 16.5% p.a. discount interest?

C.

1. On June 1, 2020 Mr. Paul Bonquin borrowed P50, 000 at 6%. He paid P20, 000 on

July 15, 2020, P10, 000 on October 20, 2020 and P10, 000 on January 25, 2021. What

is the balance due on March 15, 2021 by Merchant’s Rule?

 2. Using the Merchant’s Rule, find the balance due on the maturity date of a 10- month

8% note for P75, 000 if it is reduced by equal payments of P25, 000 made 4 months

and 7 months prior to the maturity date.

3. A debt of P30, 000 with interest at 9% is due in 9 months. If after 4 months P10, 000

is paid and 3 months later P15, 000 is paid, find the balance due on the date using the

Merchant’s Rule.

4. Using the Merchant’s Rule, find the balance due on the maturity date of a 12-month

7.5% note for P60, 000 if it is reduced by equal payments of P20, 000 made 4 months

and 7 months prior to the maturity date.

5. A debt of P40, 000 with interest at 10% is due in 9 months. If after 4 months P12, 000

is paid and 3 months later P18, 000 is paid, find the balance due on the date using the

Merchant’s Rule.

D. Find the sum paid by the buyer:

1. A freezer costing P30, 000 is sold for P15, 000 down and 6 monthly instalment of P2,

500 plus simple interest at 8% on the unpaid balance.

2. A gas range costing P24, 000 is sold for P10, 000 down and 10 monthly instalment of

P1, 400 plus simple interest at 7.5% on the unpaid balance.

3. A set of drums costing P60, 000 is sold for P30, 000 down and 10 monthly instalment

of P3, 000 plus simple interest at 9% on the unpaid balance.

4. An electric guitar costing P75, 000 is sold for P15, 000 down and 12 monthly instalment

of P5, 000 plus simple interest at 12% on the unpaid balance.

5. A refrigerator costing P55, 000 is sold for P30, 000 down and 8 monthly instalment of

P3, 125 plus simple interest at 12.5% on the unpaid balance.