MATH IF (MATHEMATICS OF THE MODERN WORLD)

MODULE
Simple Interest, Bank Discount and Promissory Notes

Section 1
Simple Interest, Maturity Value, Number of Days
between Dates, Exact and Ordinary Interest,
Banker’s Rule

Section 2
Finding Principal, Rate and Time

Section 3
Simple interest Notes, Bank Discount Notes
and Proceeds

Section 4
Discounting Promissory Notes Before Maturity
 Prepared
COURSEby:DESCRIPTION
Chris Mark V. Catalan

The course deals with nature of mathematics, appreciation of its practical,

intellectual, and aesthetic dimensions, and appreciation of mathematical tools in daily life.
The course then proceeds to survey ways in which mathematics provides a tool for
understanding and dealing with various aspects of present day living, such as managing
personal finances and making social choices. These aspects will provide opportunities
for actually doing mathematics in a broad range of exercises that bring out the various
dimensions of mathematics as a way of knowing, and test the students’ understanding
and capacity. The course also deals with business mathematics, including mathematics
of buying, selling and consumer loans useful for students’ basic understanding of
invoices, trade discounts, shipping terms, markups, markdowns, credit terms and loan
agreements. This will reinforce and supplement students’ practical knowledge in basic
and financial accounting.

COURSE OUTLINE

Course Content/Subject Matter

Week 1-3 A. Simple Interest, Bank Discount and Promissory
Notes
Week 4-6 B. Compound Interest

Week 7-8 C. Annuity Part 1

Week 9 D. Midterm Exam

Week 10-11 E. Annuity Part 1

Week 12 F. Sinking Fund and Amortization

Week 13-14 G. Mathematics of Buying

 Week 15-16 H. Mathematics of Selling

Week 17 I. Depreciation

Week 18 J. Final Exam

One week (or an equivalent K. Allotted for the Midterm and the Final Exams
of three hours)

RATIONALE

The goal of the course is for students to develop the computational skills they will
need to be successful in the world of business along with a better understanding of
business concepts and situations that require a mathematical solution. Specifically, the
students are expected to understand the concepts on simple interest, simple discount,
compound amount, basic concepts on annuities and able to apply this concept in various
business transactions in which calculation are required

INSTRUCTIONS TO USERS

Read the main content of the module under developmental activities sections and answer
the problems indicated in the closure activities.

The learners should have a good background on the following concepts

1. Whole numbers, decimals, fractions, and percent

2. Rules in manipulating equations and formulas.
3. Fluency in calculator use is required.

MODULE 1 LEARNING OBJECTIVES

1. Calculate simple interest and bank discount.

 2. Manipulate simple interest and bank discount formula.
3. Apply simple interest and bank discount concepts in discounting promissory
notes.

Section
1 Simple Interest

Section Objectives:
1. Solve for simple interest.
2. Calculate maturity value.
3. Use the actual number of days and approximate number of days to find
the number of days from one date to another.
4. Find exact and ordinary interest.

Objective 1: Solve for simple interest.

Simple interest is interest charged on the entire principal for the entire length of the loan.
It is found using the formula shown in the following box. Principal is the loan amount, rate is
the interest rate, and time is the length of the loan in years.

Finding Simple Interest

Simple interest = Principal * Rate * Time
I=P x R x T
When using the formula I = PRT:
1. Rate (R) must first be changed to a decimal or fraction.
2. Time (T) must first be converted to years.
So, for example, a rate of 7.5%, should be changed to .075 and a time of 6 months should be
changed to 6/12=0.5 year before using I = PRT.

Example 1:

To start her business, Jessica Hernandez needs to borrow P 85,000 for 9 months. Her bank
would not lend her the money since she has no experience or assets. She found an individual who
would lend her the money at 18.5%, However, her uncle agreed to cosign on a loan for her,
meaning that he would have to pay the loan if Jessica failed to do so. On this basis, the bank would
lend the money at 10%, simple interest. Find the interest at (a) 18.5%, and b) 10%. (c) Then find
the amount saved using the lower interest rate.
Solution:
(a) I =PRT
I = P 85,000 * .185 * 9/12 Convert 18.5% to .185

I = P 11,793.75 simple interest

(b) I =PRT
I = P 85,000 * .10 * 9/12 Convert 10% to .10 (or .1)

I = P 6375 simple interest

(c) Difference = P 11,793.75 – P 6375 = P 5418.75

Quick Check 1:

Find the interest on a loan of P 14,680 for 6 months at 9%.

OBJECTIVE 2: Calculate maturity value.

The amount that must be repaid when the loan is due is the maturity value of the loan. Find this
value by adding principal and interest.

Finding Maturity
Maturity value = Principal + Interest
M=P+I
Alternatively,
M=P+I
= P + PRT
M = P( 1+ RT)

Example 2:
Tom Swift needs to borrow P 28,300 to remodel his bookstore so that he can serve coffee to
customers as they browse or sit and read. He borrows the funds for 10 months at an interest rate
of 9.25%. Find the interest due on the loan and the maturity value at the end of 10 months.
Solution:
 Interest due is found using I = PRT, where T must be in years 10 months = 10/12 year and
R=9.25% =0.0925
Interest = PRT
I = P 28,300 * 0.0925 *10/12
= P 2181.46 (rounded)
Maturity value = P + I
M = P 28,300 + P 2181.46 = P 30,481.46
Alternatively,
Maturity value = P (1+RT)
M= P 28,300 (1+.0925*10/12)
=P 30,481.46
Quick Check 2
Find the maturity value of a loan of P 48,600 at 9% for 8 months.

OBJECTIVE 3: Use the actual number of days and approximate number of days to find
the number of days from one date to another.
Up to this point, the period of the loan was given in months, but it can also be given in
days. Or a loan may be due at a fixed date, such as April 17, and we may have to figure out the
number of days until the loan must be paid off.

Actual Number of Days. To compute the actual number of days, count every day up to the
repayment date.
Approximate Number of Days. To compute the approximate number of days, assume every
month has 30 days.

Example 3:
Find the approximate and actual number of days of the following.
(a) March 24 to July 22
(b) April 4 to October 10
(c) March 15 to Dec 30

Solution:

a. March 24 to July 22

Actual Approximate
Month Number of Days Number of Days
March 7 6
April 30 30
May 31 30
June 30 30
July 22 22
Total 120 118

Note: For March, under actual number of days, there are 7 days between March 24 to March 31. While under
approximate number of days, there are only 6 days since we assumed that there are only 30 days in a month.

b. April 4 to October 10

Actual
Number of Approximate
Month Days Number of Days
April 26 26
May 30 30
June 30 30
July 31 30
August 31 30
September 30 30
October 10 10
Total 188 186

c) March 15 to Dec 20
 Actual
Number of Approximate
Month Days Number of Days
March 16 15
April 30 30
May 31 30
June 30 30
July 31 30
August 31 30
September 30 30
October 31 30
November 30 30
December 20 20
Total 280 275

OBJECTIVE 4: Find exact and ordinary interest

 A simple interest rate is given as an annual rate, such as 7% per year. Since the rate is per
year, time must also be given in years or fraction of a year when using I = PRT. If time is given in
number of days, first change it to a fraction of a year.

Finding Time in Fraction of a Year

𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐝𝐚𝐲𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐥𝐨𝐚𝐧 𝐩𝐞𝐫𝐢𝐨𝐝

𝐓=
𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐝𝐚𝐲𝐬 𝐢𝐧 𝐚 𝐲𝐞𝐚𝐫

Exact interest calculations require the use of the exact number of days in the year, 365 or
366 if a leap year. Ordinary interest, or banker’s interest, calculations require the use of 360
days. Banks commonly used 360 days in a year for interest calculations before calculators and
computers became widely available. Today, many institutions, the government, and the Federal
Reserve Banks and Central Banks use the exact number of days in a year in interest calculations.
However, some banks and financial institutions still use 360 days. You need to be able to use both.

For Exact interest: Use 365 days (or 366 days if a leap year).
𝐀𝐜𝐭𝐮𝐚𝐥 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬
𝐈= 𝐏∗𝐑∗
𝟑𝟔𝟓
𝐀𝐩𝐩𝐫𝐨𝐱𝐢𝐦𝐚𝐭𝐞 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬
𝐈= 𝐏∗𝐑∗
𝟑𝟔𝟓

Using the concept in counting of number of dates between dates and two ways to compute
the interest (Exact and Ordinary method). We can calculate the Simple Interest in four ways.
 For Ordinary interest: Use 360 days
This is known as
𝐀𝐜𝐭𝐮𝐚𝐥 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬 the Banker’s Rule
𝐈 =𝐏∗𝐑∗
𝟑𝟔𝟎
𝐀𝐩𝐩𝐫𝐨𝐱𝐢𝐦𝐚𝐭𝐞 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬
𝐈 =𝐏∗𝐑∗
𝟑𝟔𝟎

Example 5:
Radio station KOMA borrowed P 148,500 on May 12 with interest due on August 27. If
the interest rate is 10%, find the interest on the loan using (a) exact interest and (b) ordinary
interest using actual number of days and approximate number of days.

Solution:

Number of days between May 12 to August 27.

Actual
Number of Approximate Number
Month Days of Days
May 19 18
June 30 30
July 31 30
August 27 27
Total 107 105

a. Exact Interest
The exact interest is found from I = PRT with P = P 148,500, R = 0.10, and T =107/365.

𝐀𝐜𝐭𝐮𝐚𝐥 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬 𝐀𝐩𝐩𝐫𝐨𝐱𝐢𝐦𝐚𝐭𝐞 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬

𝐈 =𝐏∗𝐑∗ 𝐈 =𝐏∗𝐑∗
𝟑𝟔𝟓 𝟑𝟔𝟓
𝟏𝟎𝟕 𝟏𝟎𝟓
𝐈 = (𝐏 𝟏𝟒𝟖, 𝟓𝟎𝟎) ∗ (𝟎. 𝟏𝟎) ∗ 𝐈 = (𝐏 𝟏𝟒𝟖, 𝟓𝟎𝟎) ∗ (𝟎. 𝟏𝟎) ∗
𝟑𝟔𝟓 𝟑𝟔𝟓
I = P 4353.29 (rounded) I = P 4,271.92 (rounded)

b. Ordinary Interest

Find ordinary interest with the same formula and values, except T = 107/360.
 𝐀𝐜𝐭𝐮𝐚𝐥 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬 𝐀𝐩𝐩𝐫𝐨𝐱𝐢𝐦𝐚𝐭𝐞 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐃𝐚𝐲𝐬
𝐈 =𝐏∗𝐑∗ 𝐈 =𝐏∗𝐑∗
𝟑𝟔𝟎 𝟑𝟔𝟓
𝟏𝟎𝟕 𝟏𝟎𝟓
𝐈 = (𝐏 𝟏𝟒𝟖, 𝟓𝟎𝟎) ∗ (𝟎. 𝟏𝟎) ∗ 𝐈 = (𝐏 𝟏𝟒𝟖, 𝟓𝟎𝟎) ∗ (𝟎. 𝟏𝟎) ∗
𝟑𝟔𝟎 𝟑𝟔𝟓
I =P 4,413.75 (rounded) I = P 4,331.25 (rounded)

Note: Use banker’s rule throughout the remainder of the book unless stated
otherwise.

Quick Check 3
Find the exact and ordinary interest for a 200-day loan of P 19,500 at 9% to the nearest cent.
Then find the difference between the two interest methods.
Section 1 Exercise. Provide a short solution as shown by the solved problem in item 1.

Find simple interest and maturity value to the nearest cent.

Interest Maturity Value
1. P 3800 at 11%, for 6 months P 4009 P 209 P 4009
I= PRT= P 3800*0.11*6/12=P 209
M=P+I=P 3800+209=P 4009

2. P 10,200 at 9.5%, for 10 months _____________ ______________

3. P 5500 at 8%, for 1 year _____________ ______________

4. P 18,500 at 7.5%, for 1 ¼ years _____________ ______________

Find the actual and approximate number of days from the first date to the second
1. February 15 to April 24 _____________ ______________

2. May 22 to August 30 _____________ ______________

3. December 1 to March 10 of the following year _____________ ______________

4. October 12 to February 22 of the following year _____________ ______________

Find (a) the exact interest and (b) the ordinary interest for each of the following to the nearest
cent. Then find (c) the difference of the two methods

1. P 185,000 at 7.5% for 180 days a. ___________________

b. ___________________
c. ___________________

2. P 29,500 for 11.25% for 120 days a. ___________________

b. ___________________
c. ___________________

3. P 52,610 at 8 ½ %, for 82 days a. ___________________

b. ___________________

c. ___________________

4. P 52,000 at 8 ¾ % for 200 days a. ___________________

b. ___________________
c. ___________________
 Find the date due, the amount of interest (use banker’s rule and rounded to the nearest cent if necessary), and
the maturity value

Date Loan Face Term of Date Loan Maturity Was

Made Value Loan Rate Is Due Value
1. Mar. 12 P 4800 220 days 9% __________ __________

2. Jan. 3 P 12,000 100 days 9.8% __________ __________

3. Nov. 10 P 6300 180 days 9¼% __________ __________

4. July 14 P 20,400 90 days 11 ¾ % __________ __________

Solve the following application problems. Round dollar amounts to the nearest cent.

1. Wells Fargo Bank borrows $ 25,000,000 at 4% for 90 days from a bank in Chicago Find (a)
the interest and (b) the maturity value
.
.

2. On October 15, IBM borrows $ 45,000,000 at 8% from a bank in San Francisco and agrees to
repay the loan in 120 days using ordinary interest. Find (a) the due date and (b) the
maturity value.

3. Joe Simpson’s property tax is $ 3416.05 and is due on April 15. He does not pay until July
23. The county adds a penalty of 9.3%simple interest on his unpaid tax. Find the penalty
using exact interest.
 Section
2 Finding Principal, Rate and Time

Section Objectives
1. Find the principal.
2. Find the rate.
3. Find the time.

Principal (P), rate (R), and time (T) were given for all problems in Section 9.1, and we
calculated interest. In this section, interest is given, and we solve for principal, rate, or time.

OBJECTIVE 1 Find the principal. The principal (P) is found by dividing both sides of the
simple interest equation I = PRT by RT.

The various forms of the simple interest equation can be remembered using the circle
sketch shown above. In the sketch, I (interest) is in the top half of the circle, with P (principal), R
(rate), and T (time) in the bottom half of the circle. Find the formula for any one variable by
covering the letter in the circle and then reading the remaining letters, noticing their position. For
example, cover P and you are left with RTI .
 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐈
𝐏= 𝐨𝐫 𝐏=
𝐑𝐚𝐭𝐞 𝐱 𝐓𝐢𝐦𝐞(𝐢𝐧 𝐲𝐞𝐚𝐫𝐬) 𝐑𝐓

Example 1: Gilbert Construction Company borrows funds at 10%, for 50 days to finish building
a home. Find the principal that results in interest of P 50,000.

Solution
Write the rate as 0.10, the time as 50/360, and then use the formula for principal

𝐈
𝐏=
𝐑𝐓
𝐏 𝟓𝟎, 𝟎𝟎𝟎
𝐏= = 𝑷 𝟑, 𝟔𝟎𝟎, 𝟎𝟎𝟎
𝟓𝟎
(𝟎. 𝟏𝟎)(𝟑𝟔𝟎)

The principal is P 3,600,000. Check the answer using I = PRT. The principal is P P 3,600,000,
the rate is 10%, and the time is 54/360 year. The interest should be, and is, P 50,000.

𝟓𝟎
𝐈 = 𝐏𝐑𝐓 = 𝐏 𝟑, 𝟔𝟎𝟎, 𝟎𝟎𝟎 ∗ 𝟎. 𝟏𝟎 ∗ = 𝑷 𝟓𝟎, 𝟎𝟎𝟎
𝟑𝟔𝟎

Quick Check 1
A 90-day loan with a rate of 12% results in interest of P 285. Find the principal.
Example 2:

Frank Thomas took out a loan to pay his college tuition on February 2. The loan is due to
be repaid on April 15. The interest on the loan is P 151.20 at a rate of 10.5%. Find the principal.

Solution
First find the number of days.

Days remaining in February

Month Actual Number of Days
February 26
March 31
Days from February 2 to April 15
April 15
Total 72

Next find the principal.

𝐈
𝐏=
𝐑𝐓
P 151.20
𝐏= = P 7200
𝟕𝟐
(𝟎. 𝟏𝟎𝟓)(𝟑𝟔𝟎)

The principal is P 7200. Check the answer using the formula for simple interest.
72
I = PRT = P 7200 ∗ 0.105 ∗ = 𝐏 𝟏𝟓𝟏. 𝟐𝟎
360

Quick Check 2
A loan made on May 12 must be repaid on December 18. Find the principal given that the
rate is 9%, and the interest at maturity is P 1551.
Principal (P) can also be determined if Maturity Value is given instead of I.

From the formula,

M = P( 1+ RT)
The formula for P is,
𝐌
𝐏=
(𝟏 + 𝐑𝐓)

Example 3:

How a father must invest today at 15% simple interest in order to have P 245, 000 for the
education of his son five years later?

Solution:

In the problem, R=15%, T=5 years, and M= P 245,000 and P is unknown.

𝐌
𝐏=
(𝟏 + 𝐑𝐓)

𝐏 𝟐𝟒𝟓, 𝟎𝟎𝟎
𝐏=
(𝟏 + (𝟎. 𝟏𝟓)(𝟓 𝐲𝐞𝐚𝐫𝐬))

= 𝐏𝟏𝟒𝟎, 𝟎𝟎𝟎

The father needs to invest P 140,000 at present to gain a total amount of P 245,000 pesos five
years after.
OBJECTIVE 2: Find the rate.

Solve the formula I = PRT for rate (R) by dividing both sides of the equation by PT. The rate
found in this manner will be the annual interest rate.

𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐈
𝐑= 𝐨𝐫 𝐑=
𝐏𝐫𝐢𝐧𝐜𝐢𝐩𝐚𝐥 𝐱 𝐓𝐢𝐦𝐞(𝐢𝐧 𝐲𝐞𝐚𝐫𝐬) 𝐏𝐓

Example 4:
An exchange student from the United States living in Brazil deposits P 5000 in U.S. currency in
a Brazilian bank for 45 days. Find the rate if the interest is P 75 in U.S. currency.

Solution
𝐈
𝐑=
𝐏𝐓
P 75
𝐑= = 𝟎. 𝟏𝟐
45
(P 5000)(360 )

Convert 0.12 to a percent to get 12,. Check the answer using the simple interest formula.

Quick Check 3
A 120-day loan for P 15,000 has interest of P 412.50. Find the rate.
Example 5:
Blaine Plumbing kept extra cash of P 86,500 in an account from June 1 to August 16. Find the
rate if the company earned P 365.22 in interest during this period of time. Round to the nearest
tenth of a percent.
Solution:
Find the number of days

Month Actual Number of Days

June 29
July 31
August 16
Total 76

There are 76 days from June 1 to August 16.

𝐈
𝐑=
𝐏𝐓
P 365.22
𝐑= = 𝟎. 𝟎𝟐𝟎𝟎 (𝒓𝒐𝒖𝒏𝒅𝒆𝒅)
76
(P 86,500)(360 )

The rate of interest is 2.0%

Quick Check 4
A loan of P 37,000 made on February 4 results in interest of P 770.83. If the loan is due on
May 15, find the rate to the nearest tenth of a percent.
OBJECTIVE 3 Find the time. The time (T) is found by dividing both sides of the simple
interest equation I = PRT by PR. Note that time will be in years, or fraction of a year.

𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐈
𝐓 (𝐢𝐧 𝐲𝐞𝐚𝐫𝐬) = 𝐨𝐫 𝐓=
𝐏𝐫𝐢𝐧𝐜𝐢𝐩𝐚𝐥 𝐱 𝐑𝐚𝐭𝐞 𝐏𝐑

The preceding formula gives time in years, but we often need time in days or months. Find
these as follows.

𝐈
𝐓 (𝐢𝐧 𝐝𝐚𝐲𝐬) = 𝒙𝟑𝟔𝟎 (𝑼𝒔𝒊𝒏𝒈 𝑶𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕)
𝐏𝐑

𝐈
𝐓 (𝐢𝐧 𝐝𝐚𝐲𝐬) = 𝒙𝟑𝟔𝟓 (𝑼𝒔𝒊𝒏𝒈 𝑬𝒙𝒂𝒄𝒕 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕)
𝐏𝐑

Example 5:
Roberta Sanchez deposited P 18,600 in an account paying 3%, and she earned P217 in interest.
Find the number of days that the deposit earned interest using Ordinary and Exact Interest
method.
Solution:
Ordinary Interest Exact Interest
𝐈 𝐈
𝐓 (𝐢𝐧 𝐝𝐚𝐲𝐬) = 𝒙𝟑𝟔𝟎 𝐓 (𝐢𝐧 𝐝𝐚𝐲𝐬) = 𝒙𝟑𝟔𝟎
𝐏𝐑 𝐏𝐑
𝐏 𝟐𝟏𝟕 𝐏 𝟐𝟏𝟕
= (𝐏 𝟏𝟖,𝟔𝟎𝟎)(𝟎.𝟎𝟑) 𝒙 𝟑𝟔𝟎 = (𝐏 𝟏𝟖,𝟔𝟎𝟎)(𝟎.𝟎𝟑) 𝒙 𝟑𝟔𝟓

=140 days =142 days (rounded)

Quick Check 5
A loan for P 22,000 results in interest of P 1283.33 at 10.5%. Find the time to the nearest day.
Section 2 Exercises. Provide a short solution as shown by the solved problem in item 1.
Find the principal in each of the following. Round to the nearest cent.
Rate Time (in days) Interest Principal
1. 10% 80 P 112 __________________

2. 6% 24 P 62.40 __________________

3. 8½% 120 P 4420 __________________

4. 10.5% 140 P 87.20 __________________

5. 9.5% 120 P 186 __________________

Find the rate in each of the following. Round to the nearest tenth of a percent.
Principal Time Interest Rate
1. P 7600 200 days P 498.22 __________________

2. P 15,600 90 days P 312 __________________

3. P 42,800 60 days P 677.67 __________________

4. P 20,000 90 days P 625 __________________

5. P 8000 4 months P 200 __________________

Find the time in each of the following. In Exercises 1–3 round to the nearest day; in Exercises 4
and 5, round to the nearest month.

Principal Rate Interest Time

1. P 36,000 9%, P 585 ________________________

2. P 24,000 11% P 454.70 ________________________

3. P 20,000 8% P 1200 ________________________

4. P 3500, 10 ¼ % P 143.50 ________________________

5. P 8400 7 ¼% P 357 ________________________

In each of the following application problems, find principal to the nearest cent, rate to the
nearest tenth of a percent, or time to the nearest day.

1. Hoyt Axton earned P 244.80 interest in 9 months in a short-term savings account that
paid 3.2% per year. Use the simple interest formula to estimate the amount initially
invested.

2. Joan Gretz invested P 3600 in a mutual fund containing bonds. Find the rate if she earned
P 237.50 in interest in 250 days.

3. Hot Air Balloon Tours, Inc. must pay the bank P 23,515.27 in interest 300 days after
making a loan of P 328,120 to purchase hot air balloons.

4. James Smith lets an P 1800 mortgage payment go 70 days overdue and is charged a
penalty of P 59.50. Find the rate of interest that was charged as a penalty.

5. Jan Rice signed a promissory note for P 6400 at 11 ½ %, interest with interest charges of
P 425.24. Find the term of the note to the nearest day.
 Section
3 Promissory Notes, Bank Discounts and Proceeds

Section Objectives
1. Define the basic terms used with notes
2. Find the bank discount and proceeds.
3. Find the face value.
4. Comparing Discount Notes and Simple Interest Notes
5. Find the effective interest rate

OBJECTIVE 1: Define the basic terms used with notes

A promissory note is a legal document in which one person or firm agrees to pay a
certain amount of money, on a specific day in the future, to another person or firm. An example
of a promissory note follows.

Maker or payer: The person borrowing the money.

(Madeline Sullivan in the sample note)
Payee: The person who loaned the money and who will receive the payment
(Charles D. Miller in the sample note)
Term: The length of time until the note is due (90 days in the sample note)
Face value or principal: The amount being borrowed
($27,500 in the sample note)
Maturity value: The face value plus interest, also the amount due at maturity
Maturity date or due date: The date the loan must be paid off with interest
(June 4 in the sample note)
Find the interest and the maturity value on the loan in the sample note above.
Interest = Face value * Rate * Time
Interest = P 27,500 * .12 *90/360 = P 825
Maturity value = Face value + Interest
Maturity value = P 27,500 + P 825 = P 28,325

Madeline Sullivan must pay P 28,325 to Charles D. Miller on June 4, the maturity date of
the note.
A simple discount notes, which are simply a different way to set up a promissory note
based on simple interest calculations. Any note that uses simple interest calculations with a lump-
sum payment can be set up either as a simple interest note or as a simple discount note. One type
of note is not better than the other type of note. They merely represent two different ways to discuss
the same thing. We study both because some banks use simple
interest notes while others use simple discount notes.

As we saw earlier, simple interest notes involve principal (face value or loan amount),
interest rate, time, interest, and maturity value. Simple discount notes involve proceeds (loan
amount), discount rate, time, bank discount (interest), and face value (or maturity value).
Face value in a simple interest note is the amount loaned to the borrower, but it is the maturity
value in a simple discount note. Simple discount notes are also called interest-in-advance notes,
since interest is subtracted before funds are given to the borrower. A basic difference between the
two types of notes is that simple interest is calculated based on principal, whereas simple discount
is calculated based on maturity value,

Simple Interest versus Simple Discount Notes

Repayment
Type of Note Loan Amount Interest
Amount
Face value + =
Simple interest Interest Maturity Value
(Principal)
+ Discount = Face value
Simple discount Proceeds
(Interest) (Maturity value)

Note: Simple interest is calculated on the principal, while simple discount is calculated on the maturity value.
OBJECTIVE 2: Find the bank discount and proceeds.
The formula for finding the bank discount is a form of the basic percent equation. The
formula is similar to the one used to calculate simple interest, but different letters are used since
the ideas differ slightly.

Calculating Bank Discount

Bank discount = Face value * Discount rate * Time
Then, if P is the proceeds,
Proceeds (loan amount) = Face value - Bank discount or
P=M-B
Stated in another way,
Face value = Proceeds (loan amount) + Bank discount or
M=P+B
Note: Time must be given in years.

Example 1:
Jim signs a simple discount note with a face or maturity value of P35,000 so that he can
purchase a computer for his online business. The banker discounts the 10-month note at 9%.
Find the amount of the discount and the proceeds.

Solution:
Jim does not receive P 35,000 from the bank—that is the amount he must repay when the loan
matures. Use M = P 35,000, D = 9%, and T = 10/12 in the formula B = MDT to find the
discount, which is the interest that must be paid at maturity.
Bank discount = M x D x T
B = P 35,000 x 0.09 * 10/12 = P 2625

The discount of P2625 is the interest charge on the loan. The proceeds that Jim actually
receives when making the loan is found using P = M - B.
P=M-B
P = P 35,000 – P 2625 = P 32,375
Jim signs the discount note with a face value of P 35,000, but receives P 32,375. Ten
months later he must pay P 35,000 to the bank. The difference is interest.
1Eee
Quick Check 1
A simple discount loan has a maturity value of P 15,800, discount rate of 9%, and time of 180
days. Find the bank discount and proceeds.

Example 2:
To finance a new electronic sign to put in front of a retail store, Mustang Auto signs a 6-month,
simple discount note with a face value of P 45,000. Find the proceeds if the discount rate is 10.5%
Solution
The bank discount (B) is not known, but we do know that B = MDT. Therefore, we can substitute
MDT in place of B.
P=M-B
P = M – MDT Substitute MDT in place of B.

P = M (1–DT) Factor out M

P = P 45,000 (1- 0.105 *6/12) Substitute values.

P = P 42637.50
Mustang Auto receives P 42637.50 but must pay back P 45 000 in 6 months.

Quick Check 2
A 220-day loan with a face value of P 40,000 has a discount rate of 12%. Find the proceeds.
OBJECTIVE 3: Find the face value.
If the loan amount (proceeds) of a simple discount note is known, use the following
formula to find the corresponding face value.

Calculating Face Value to Achieve Desired Proceeds

𝑷
𝑴=
𝟏 − 𝑫𝑻
where
M = Face value of the simple discount note
P = Proceeds received by the borrower
D = Discount rate used by the bank
T = Time of the loan (in years)

Example 3:

Tina Watson purchased a classic 1961 Corvette and plans to rebuild it. She needs to
borrow P 18,000 for 180 days. Find the face value of the 10%, simple discount note that would
result in proceeds of P 18,000 to Watson.

Solution

Use the formula.

𝑷
𝑴=
𝟏 − 𝑫𝑻

Replace P with P 18,000, D with .10, and T with 180/360.

𝑷 𝟏𝟖, 𝟎𝟎𝟎
𝑴=
𝟏𝟖𝟎
𝟏 − 𝟎. 𝟏𝟎 ∗ 𝟑𝟔𝟎

= P 18,947.37 (rounded)
The face value of the note is P 18,947.37. However, Watson receives only P 18,000 from the
bank when the note is signed. She must repay P 18,947.37 to the bank in 180 days.

Quick Check 3
A 300-day note has proceeds of P 48,000 and a discount rate of 8.8%. Find the maturity value.

Objective 4: Comparing Discount Notes and Simple Interest Notes

Example 4:

Jane Benson of Benson Automotive has been offered loans from two different banks. Each note
has a face value of P 750,000 and a time of 90 days. One note has a simple interest rate of 10%,
and the other a simple discount rate of 10%. Benson wants to know which is the better deal.

Solution:
Find the interest owed on each.

Simple Interest Note Simple Discount Note

I = PRT B = MDT

I = P 750,000 * .10 *90/360 I = P 750,000 * .10 *90/360

I = P 1875 B = P 1875

The amount of interest is the same in both notes. Now find the amount the borrower would
receive.

Simple Interest Note Simple Discount Note

Proceeds = M - B
Face value = P 750,000 = P 750,000 – P 18,750
= P731, 250

The borrower has the use of P 75,000 with the simple interest note, but only P 73,125
with the simple discount note. Yet the amount of interest is identical. So, the simple interest note
is the better deal for Benson in this situation. However, it is NOT true that a simple interest note
is always better than a simple discount note. You must compare the terms of each to discover
which is better. Find the maturity value of each note as follows.

Simple Interest Note Simple Discount Note

M=P+I
Maturity Value= Face Value
= P 75,000 + P 18, 750
= P 750, 000
= P 768, 750

The differences between these two notes can be summarized as follows.

Simple Interest Note Simple Discount Note

Face value P 750 000 P 750 000

Interest P 18, 750 P 18, 750

Amount available to
P 750 000 P 731 250
borrower

Maturity value P 768 750 P 750 000

OBJECTIVE 5: Find the effective interest rate.
The effective rate of interest is also called the annual percentage rate, the APR, and the
true rate. It is the interest rate that is calculated based on the actual amount received by the
borrower. The discount rate of 10%, stated in Example 4 is called the stated rate, or nominal
rate, since it is the rate written on the note. It is not the effective rate, since the 10%, applies to the
maturity value of P750,000 and not to the proceeds of P 731, 250 actually received by the borrower.
The next example shows how to find the effective rate for Example 4.

Example 4:

Find the effective rate of interest (APR) for the simple discount note of Example 4.

Solution
Find the effective rate (APR) by using the formula for simple interest: I = PRT. In this case,
I = P 18, 750 (the discount), P = 731,250 (the proceeds), and T = 90/360.

𝐈
𝐑=
𝐏𝐓

P 18,750
𝐑= = 𝟎. 𝟏𝟎𝟐𝟔 = 𝟏𝟎. 𝟐𝟔%(𝒓𝒐𝒖𝒏𝒅𝒆𝒅)
90
(P 731,250)(360)

Thus, the 10.26% effective rate of the simple discount note is higher than the 10, effective rate of
the simple interest note showing that the simple interest note is better for the borrower in this
situation.

Quick Check 4
Find the effective rate (APR) for a loan with a loan amount of P 31,000, a time of 90 days, and
interest of P 891.
Section 3 Exercises:
Find the discount to the nearest cent, then find the proceeds
Face Discount Time Proceeds or
Value Rate (Days) Discount Loan Amount
1. P 7800 9% 120 __________________

2. P 15,000 10.25% 90 __________________

3. P 19,000 10% 180 __________________

4. P 12,500 11% 150 __________________

5. P 22,400 8¾% 75 __________________

Find the maturity date and the proceeds for the following. Round to the nearest cent

Face Discount Date Time Maturity Proceeds or

Value Rate Made (Days) Date Loan Amount

1. P 64,000 9.5% Mar. 22 90 ________ ____________

2. P 9500 12% Oct. 12 100 ___________ ____________

3. P 10,000 10 ¼ % July 12 150 ___________ ____________

4. P 24,000 10% Dec. 10 60 ___________ ____________

5. P 8000 10.5% Nov. 4 165 ___________ ____________

Solve each of the following application problems. Round rate to the nearest tenth of a percent,
time to the nearest day, and money to the nearest cent.

1. Jessica Hernandez was unable to collect funds owed her from a customer that declared bankruptcy. The
shortage of cash forced Hernandez to sign a P 12,200 note at a discount rate of 11% to pay her bills. She
was told the interest would be P 931.94. Find the length of the loan in days.

Answer: _____________________
2. Wyatt Construction borrowed P 157.25 million during the construction phase of adding a wing to a casino
in Las Vegas. Management signed a 270-day note with a face value of P 170 million. Find the discount
rate.

Answer: _____________________
3. A regional manager at Trugreen, Inc. authorizes the borrowing of P 98,300 for trucks and sprayers needed
to spray yards with fertilizers and pesticides. The simple discount note has a 9.25% rate and matures in 150
days. Find the face value of the loan needed.

Answer: _____________________
4. Cathy Cox has poor credit but she found a bank that will lend her P 4200 when she uses some collateral.
Still, the bank charges a 12, discount rate. Find (a) the proceeds if the note is for 10 months and (b) the
effective interest rate charged by the bank.

Answer: _____________________
5. As a borrower, would you prefer a simple interest note with a rate of 11% or a simple discount note at a rate
of 11%? Explain using an example.
Section 4 Discounting a Note Before Maturity

Section Objectives
1. Understand the concept of discounting a note.
2. Find the proceeds when discounting simple interest notes.
3. Find the proceeds when discounting simple discount notes.

A note is a legal responsibility for one individual or firm to pay a specific amount on a
specific date to another individual or firm. Notes can be bought and sold just as an automobile can
be bought and sold. The clipping taken from a newspaper shows firms that buy notes. This section
shows how to find the value of a note that is sold before its maturity date.

OBJECTIVE 1 Understand the concept of discounting a note.

Businesses sometimes help their customers purchase products or services by accepting a
promissory note rather than requiring an immediate cash payment. For example, a company that
manufactures boats, a retailer that sells the boats, and a bank may do business as follows:

1. Boat manufacturer sells boats to a retailer and accepts a promissory note instead of cash.
2. Boat manufacturer needs cash and sells the note to a bank before it matures.
3. Retailer pays the maturity value of the note to the bank when due.

The bank deducts a fee from the maturity value of the note when it buys the note from the
manufacturer. The fee is interest for the number of days, called the discount period, that the bank
will hold the note until it is due. The fee charged by the bank is the bank discount or just discount.
The discount rate is the percent used by the bank to find the discount. The process of finding the
value of the note on a specific date before it matures is discounting the note. Both simple interest
notes and simple discount notes can be discounted before they mature.

OBJECTIVE 2: Find the proceeds when discounting simple interest notes.

The amount of cash actually received by the boat manufacturer on the sale of a
promissory note is the proceeds. The bank then collects the maturity value from the maker of the
note, the retailer, when it is due.

Calculate the Proceeds When Discounting a Simple Interest Note

1. First, understand the simple interest note by finding:
(a) the due date of the original note and
(b) the maturity value of the original note (M = P + I, where I = PRT).
2. Then discount the simple interest note.
(a) Find the discount period, which is the time (e.g., number of days) from
the sale of
the note to the maturity date of the note.
(b) Find the discount using the formula
B=M*D*T
= Maturity value * Discount rate * Discount period
(c) Find the proceeds after discounting the original note using P = M - B.

Example 1:
Jameson Plumbing takes a simple interest, 180-day note
from a contractor with a face value of P 64,750 and a rate
of 10.5%. The company sells the note to a bank 50 days later
at a discount rate of 12%. Find the proceeds to the plumbing company.
Solution

Step 1: Find the maturity value. The face value equals the proceeds, since this is a simple
interest note.

Maturity value = Principal + Interest on the simple interest note

Maturity value = P 64,750 + PRT Since I = PRT
Maturity value = P 64,750 + P 64,750 * .105 *180/360
= P 68,149.38 (rounded)
Step 2 The note is discounted after 50 days, so the discount period is 180 - 50 = 130 days.
This means that the buyer of the note will own it for 130 days before the note is
paid off.

Use the formula B = MDT, with M = P 68,149.38, D = .12, and T = 130/360 to find the discount.
Bank discount = MDT
= P 68,149.38 * .12 *130/360
= P 2953.14
Proceeds = Maturity value of simple interest note - Bank discount
Proceeds = P 68,149.38 - P 2953.14
= P 65,196.24

So, the following occurs:

1. A contractor signs a 180-day simple interest note with a face value of P 64,750 to
Jameson Plumbing.
2. After 50 days, Jameson Plumbing sells the note to a bank and receives P 65,196.24
in cash.
 3. The bank receives P 68,149.38 on the maturity date of the loan.

Quick Check 1
A simple interest note has a face value of P 28,000, a rate of 9,, and a time to maturity of 240 days.
It is discounted after 80 days at a rate of 11%. Find the maturity value of the simple interest note
and the proceeds at the time of the discount.

Example 2:

Blues Recording holds a 200-day simple interest note from a rock group that agreed to pay
them to record an album and produce 1000 CDs. The 12% simple interest note is dated March 24
and has a face value of P 48,000. Blues Recording wishes to convert the note to cash, so they sell
it to a bank on August 15. If the bank requires a discount rate of 12.5% find the proceeds to the
recording studio.
Solution:

Go through the two steps of discounting a note.

Step 1 Find the maturity value. The note is dated March 24 and is due in 200 days.
Due date: March 24 + 200 days = October 10
Since this is a simple interest note, the proceeds are given but the maturity value must
be found. First find the interest on the note if held until maturity.

I = PRT = P 48,000 * .12 *200/360 = P 3,200

Maturity value: P 48,000 + P 3,200 = P 51,200.

Step 2 Now discount this simple interest note.

(a) Find the discount period. The discount period is the number of days from
August 15, which is the date the note is discounted (sold) to the bank, to the due
date of the note (October 10).

There are 56 days between August 15 to October 10

Blues Recording holds the 200-day note for 200 - 56 = 144 days before they sell it.
The buyer of the note holds it for 56 days before the rock group must pay off the note.

(b) Find the bank discount. Find the discount by using the formula B = MDT, where
M = P 51,200, D = 12.5,, and T is 56/360.

Bank discount=MDT
= P 51,200 * .125 *56/360
= P 995.56
(c) Find the proceeds. Proceeds are found by subtracting the bank discount from the
maturity value.
P=M-B
P = P 51,200 - P 995.56

= P 50,204.44

Date Transaction
March 24 Rock group signs 200-day simple interest note for
P 48,000.
August 15 Blues Recording sells note to bank for P 50,204.44.
October 10 Bank receives P 51,200 from payer (rock group).
Quick Check 2
On March 27, Dayton Finance loans Jorge Rivera P 9200 for 150 days at 11, simple
interest. The finance company sells the note on April 24. Find the maturity value of the
simple interest note and the proceeds to Dayton Finance if the note is sold at a discount
rate of 12%.

OBJECTIVE 3 Find the proceeds when discounting simple discount notes.

Calculate the Proceeds When Discounting a Simple Discount Note

1. First, understand the simple discount note by finding:
(a) the due date of the original note,
(b) the discount of the original note using B = MDT, and
(c) the proceeds from the original note using P = M - B.
The maturity value (face value) of the note is written on the note itself and is the
value needed in step 2(b) below.
2. Then discount the simple discount note.
(a) Find the discount period, which is the time (e.g., number of days) from the Example
3
sale of
the note to the maturity date of the note.
Example 3:
(b) Find the discount using the formula B = MDT.
Benson Automotive used excess cash to purchase a P 100,000 Treasury bill with a term of
(c) Find the proceeds after discounting the original note using P = M - B.
26 weeks at a 3.5, simple discount rate. However, the firm needs cash exactly 8 weeks later and
sells the T-bill. During the 8 weeks, market interest rates changed slightly so that the bill was sold
at a 3, discount rate. Find (a) the initial purchase price of the T-bill, (b) the proceeds received by
the firm at the subsequent sale of the T-bill, and (c) the effective interest rate.
Solution
(a) Find the discount and proceeds. The discount that Benson Automotive receives when
buying the T-bill is found as follows.
B = MDT
= P 100,000 * .035 *26/52
= P 1750
The cost to the company is the maturity value minus the discount.

P=M-B
= P 100,000 - P 1750
= P 98,250

Therefore, the U.S. government receives P 98,250 from the sale of the T-bill.

(b) Find the discount period, discount, and proceeds. Now follow the steps in the table to
find the proceeds Benson Automotive receives for selling the T-bill. The discount period is
18 weeks, since the T-bill is sold 26 - 8 = 18 weeks before its due date.

The discount at the time of the sale is as follows.

B = MDT
= P 100,000 * .03 *18/52
= P 1038.46
Finally, the proceeds equal the maturity value of the T-bill (P 100,000) less the discount at
the time of the sale.
P=M–B
= P 100,000 - P 1038.46
= P 98,961.54
(c) Benson Automotive paid P 98,250 to buy the T-bill and received P 98,961.54 for it
8 weeks later.
Interest received = P 98,961.54 - P 98,250
= P 711.54
P 711.54
𝐑= = 𝟎. 𝟎𝟒𝟕𝟏 = 𝟒. 𝟕𝟏%(𝒓𝒐𝒖𝒏𝒅𝒆𝒅)
8
(P 98,250)( )
52

The company would have earned 3.5, on the T-bill had it left the Treasury bill invested
until maturity. Instead, the company sold it after market interest rates rose, but before the T-bill
matured. This caused the company to end up with an effective interest rate somewhat higher
than the 3.5%.

Quick Check 3
A 240-day discount note has a maturity value of P 24,000 and a discount rate of 8,. It is
sold after 100 days at a discount rate of 10.5%. Find the maturity value of the original discount
note and the proceeds at the time of the sale.
Section 4 Exercises:
Find the maturity value of each of the following simple interest notes. Each note is then discounted
at 12%. Find the discount period, the discount, and the proceeds after discounting.
Date Loan Face Length Maturity Date of Discount
Was Made Value of Loan Rate Value Discount Period Discount Proceeds

1. Feb. 7 P 6200 90 days 10.5% __________ Apr. 1 _____ ________ _________

2. June 15 P 9200 140 days 12% __________ Oct. 22 _____ _______ _________

3. July 10 P 2000 72 days 11% __________ Aug. 2 _____ ______ _________

4. May 29 P 5500 80 days 10% __________ July 8 _____ ________ ___________

Solve the following application problems. Round interest and discount to the nearest cent.

1. First Bank loaned P 360,000 for 180 days to a company purchasing a rock-crushing machine. The bank
sold the 7% simple interest note 120 days later at an 8, discount rate. Find (a) the bank discount and (b) the
proceeds.

Answer: _____________________

2. Cook and Daughters Farm Equipment accepts a P 5800 simple interest note at 12, for 100 days, for a small
used tractor. The note is dated May 12. On June 17, the firm discounts the note at the bank, at a 13%
discount rate. Find (a) the bank discount and (b) the proceeds.

Answer: _____________________

3. Hanson’s Jewelry signed a 180-day simple discount note with a face value of P 250,000 and a rate of 9 %on
March 19. The lender sells the note at an 8% discount rate on June 14. Find (a) the proceeds of the original
note, (b) the discount period, (c) the discount and (d) the proceeds at the sale of the note on June 14.

Answer: _____________________

4. To build a new warehouse, Alco Fence Co. signed a P 300,000 simple interest note at 9, for 150 days with
National Bank on November 20. On February 6, National Bank sold all of its notes to Bank One. Find (a)
the maturity value of the note and (b) the proceeds to National Bank given a discount rate of 10.5% A
National Tire and Battery outlet borrowed P 48,500 on a 200-day simple interest note to expand the battery
store. The note was signed on December 28 and carried an interest rate of 9.8%. The note was then sold on
March 17 at a discount rate of 10%. Find (a) the maturity value of the note and (b) the proceeds to the seller
of the note on May 17.
 Answer: _____________________

I. SYNTHESIS

There are similarities and differences between simple interest and simple discount
calculations

> Both types of notes involve lump sums repaid with a single payment at the end of a
stated period of time.
>The length of time is generally 1 year or less.

The following table compares simple interest and simple discount notes.
 References

Ballada, Ballada, Math in the Business World, 2019, 1st edition

Ballada, Ballada, Investment Mathematics, 2012 issue

Mathematics in the Modern World

Mathematics of Investment 5th Edition by Asuncion C. Mercado Del Rosario, copyright 2011,
Del Ros Publishing House

Clendenen G., Salzman S. Business Mathematics 13ed 2015, Pearson Publishing,