CHAPTER 5

PROMISSORY NOTES

Learning Outcomes

At the end of this lesson, you should be able to:

 explain the promissory notes

 discuss bank discounts and proceeds
 apply the formula to calculate discounting promissory notes problems.

5.1 Promissory Notes

(i) A promissory note is a short debt instruments.

(ii) The main features of a promissory notes are as follows:

a) Maker – the maker is the person that signs the note.

b) Payee – the payee is the person to whom the payment is to be made.
c) Date of the note – the date on which the note is made.
d) Term of the note – the length of time until the note is due for payment.
e) Face value – the amount stated on the note.
f) Maturity value – the total payment amount on maturity date.
g) Maturity date – the due date of loan period.

Example:
RM 3 000 2 June 2022
One hundred days after date, I promise to pay to the order of Azman
bin Azlan Ringgit Malaysia: Three thousand only for value received
with interest at the rate of 6 % per annum until paid.
Due: 10 September 2022 Karim bin Rahman

From the promissory note above;

a) The maker of the note is Karim bin Rahman

b) The payee of the note is Azman bin Azlan
c) The date of the note is 2 June 2022
d) The maturity date is 10 September 2022
e) The term of the note is 100 days
f) The face value is RM 3 000
g) The maturity value is RM 3 000 X 6 % X 100 days from 360 days = RM 3 050
5.2 Bank Discount

(i) Bank discount means interest charged in advanced.

(ii) Proceed defined as the amount received by the borrower after deduct bank discount.

(iii) For example, let assume a person borrow RM 10 000 from a bank for one year that
charged 10 % bank discount rate per annum. The bank discount amount is RM 1 000.
The bank takes this amount in advanced and the borrower just received RM 9 000 as a
proceed.

(iv) Bank discount can be calculated by using this formula;

𝑫 = 𝑺𝒅𝒕

where 𝑫 = bank discount

𝑺 = maturity value
𝒅 = bank discount rate
𝒕 = term in a year

(v) The proceeds are computed as follows;

𝑷𝒅 = 𝑺 − 𝑫
𝑷𝒅 = 𝑺 − 𝑺𝒅𝒕
𝑷𝒅 = 𝑺(𝟏 − 𝒅𝒕)

(vi) Simple interest rate equivalent to bank discount rate;

solving d when r given:

𝒓
𝒅=
𝟏 + 𝒓𝒕

solving r when d given:

𝒅
𝒓=
𝟏 − 𝒅𝒕
 CLASS ACTIVITY

Exercise 5.1

A promissory note dated 11 August 2022 reads “100 days from a date, I promise to pay RM
3 000 with interest rate 6 % per annum”.
a) Find the maturity date of the note
b) Find the maturity value of the note
(ans: 19 𝑁𝑜𝑣𝑒𝑚𝑏𝑒𝑟 2022; 𝑅𝑀 3 050)

Exercise 5.2

Ani receives a 150-day promissory note with a simple interest rate of 12 % per year. The
face value of the note is RM 8 000 and the maturity date is 16 November 2022. Find the:
a) date of the note
b) maturity value
c) interest charged
(ans: 19 𝐽𝑢𝑛𝑒 2022; 𝑅𝑀 8 400; 𝑅𝑀 400)

Exercise 5.3

The interest on a 150-day promissory note is RM 350. If the interest rate is 12 % per annum,
find the face value of the note.
(ans: 𝑅𝑀 7 000)

Exercise 5.4

Kamal borrows RM 5 000 for six months from a lender that charges him discount rate 8.5 %
per annum. Find the discount and the proceeds.
(ans: 𝑅𝑀 212.50; 𝑅𝑀 4 787.50)

Exercise 5.5

John needs RM 25 000 to start new business. How much could he borrow from a bank for 3
years with bank discount rate 7.2 % per annum?
(ans: 𝑅𝑀 31 887.76)

Exercise 5.6

A bank discount of RM 5 000 note due in eight months with a bank discount rate of 10 %.
Find the equivalent simple interest rate that is charged by the bank.
(ans: 10.71 %)

Exercise 5.7

Calculate the bank discount rate if the simple interest rate is 6.5 % per annum on a 6 months’
loan. (ans:
6.3 %)
5.3 Discounting Promissory Notes

Date of the note Discount date Maturity date

Face Value Proceeds Maturity Value

𝑑%
Discount period

𝑟%
Term of the note

Formula involved to solve discounting promissory notes problems;

Simple Interest Formula:

𝑺𝒊𝒎𝒑𝒍𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕, 𝑰 = 𝑷𝒓𝒕

𝑴𝒂𝒕𝒖𝒓𝒊𝒕𝒚 𝑽𝒂𝒍𝒖𝒆, 𝑺 = 𝑷(𝟏 + 𝒓𝒕)

𝑺=𝑷+𝑰

Bank Discount Formula:

𝑩𝒂𝒏𝒌 𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕, 𝑫 = 𝑺𝒅𝒕

𝑷𝒓𝒐𝒄𝒆𝒆𝒅, 𝑷𝒅 = 𝑺(𝟏 − 𝒅𝒕)

𝑷𝒅 = 𝑺 − 𝑫
 CLASS ACTIVITY

Exercise 5.8

Ridzuan, a businessman, receives a promissory note for RM 15 000 with interest at 12 % per
annum that is due in 100 days. The note is dated 10 April 2022. The note is discounted on 10
May 2022 at a bank that charges 10 % discount per annum. Calculate:
a) the maturity date
b) the maturity value
c) the discount period
d) the proceeds
(ans: 19 July 2022; 𝑅𝑀 15 500; 70 𝑑𝑎𝑦𝑠; 𝑅𝑀 15 198.61)

Exercise 5.9

Muthu received a 120-day promissory note for RM 25 000 which matures on 12 August 2022
with a simple interest rate of 7.2 % per annum. He later discounted the note 60 days before
the maturity date and obtained RM 25 344.
a) the date of the note
b) the maturity value
c) the bank discount
d) the bank discount rate

(ans: 14 𝐴𝑝𝑟𝑖𝑙 2022; 𝑅𝑀 25 600; 𝑅𝑀 256; 6 %)

Exercise 5.10

Julia receives a 90-day promissory note on 4 March 2022 with an interest rate of 6.5 % per
annum simple interest. After 40 days, she discounts the note at a discount rate of 4.6 % and
receives proceed of RM 10 097.57.
a) the maturity date
b) the maturity value
c) the face value
d) the amount on interest received by Julia

(ans: 2 𝐽𝑢𝑛𝑒 2022; 𝑅𝑀 10 162.50; 𝑅𝑀 10 000; 𝑅𝑀 97.57)