Professional Documents
Culture Documents
Chapter 2
Chapter 2
$10,000
___________a. LAWTON, OKLAHOMA October 2, 2007
______________________c.
__________________________b.
Sixty days AFTER DATE _______
We PROMISE TO PAY TO
G.J. Equipment Company
THE ORDER OF ___________________________________________d.
____________________________________________DOLLARS
Ten Thousand and 00/100 -------
PAYABLE AT ____________________________________
Able National Bank
9%
VALUE RECEIVED WITH INTEREST AT ______e. REGAL CORPORATION f.
NO. ______
114 DUE _____________________g.
December 1, 2007 ________________
J.M. Moore
TREASURER
11-5
Simple Discount Note - Example
Terrance Rime borrowed $10,000 for 90 days from
Webster Bank. The bank discounted the note at 10%.
What proceeds does Terrance receive?
Bank Discount
Rate
$10,000 - $250 = $9,750
Proceeds
11-6
Comparison
11-7
Comparison - Effective Rate
11-8
Table 11.1 - Comparison of simple interest
note and simple discount note
Simple interest note (Chapter 10) Simple discount note (Chapter 11)
1. A promissory note for a loan with a term of usually 1. A promissory note for a loan with a term of usually
less than 1 year. Example: 60 days less than 1 year. Example: 60 days
2. Paid back by one payment at maturity. Face value 2. Paid back by one payment at maturity. Face value
equals actual amount (or principal) of loan (this is not equals maturity value (what will be repaid)
maturity value)
3. Interest computed on maturity value or what will be
3. Interest computed on face value or what is actually repaid and not on actual amount borrowed. Example:
borrowed. Example: $186.67 $186.67
4. Maturity value = Face value + Interest 4. Maturity value = Face value
Example: $14, 186.67 Example: $14, 000
5. Borrower receives the face value 5. Borrower receives proceeds = Face value - bank
Example: $14,000 discount. Example: $13,813.33
6. Effective rate (true rate is same as rate stated on 6. Effective rate is higher since interest was deducted
note). Example: 8% in advance. Example: 8.11%
7. Used frequently instead of the simple discount note. 7. Not used as much now because in 1969
Example: 8% congressional legislation required that the true rate of
interest be revealed. Still used where legislation does
not apply, such as personal loans.
11-9
Treasury Bills
Loan to Federal Govt.
Terms of Purchase
91 days (13 Weeks)
or
1 Year
11-11
Discounting an Interest-Bearing
Note before Maturity
Camille Wilson sold the following promissory note to the bank:
Date of Face Value Length of Interest Bank Discount Date of
note of note note rate rate discount
March 8 $2,000 185 days 10% 9%
11-12
Discounting an Interest-Bearing
Note before Maturity
What are Camille’s interest and maturity value? What are the
discount period and bank discount? What are the proceeds?
I = $2,000 x .10 x 185 = $102.78
360
MV = $2,000 + $102.780 = $2,102.78
$2,102.78 x .09 x 31 = 16.30
360 $2102.78 – 16.30 = $2,068.48
Calculation
on next slide
11-13
Calculation of days without table
Manual Calculation Table Calculation
March 31 August 9 221 days
-8 March 8 -67 days
23 154 days passed
before note is discounted
April 30
185 day note
May 31
-154
June 30 31 discount pd.
July 31
August 9 185 days - length of note
154 -154 days Camille held note
116 days bank waits
11-14
Problem 11-10:
Solution:
$23.90 _ $23.90
= = .95829% = .96%
$9,976.10 x 13 $2,494.025
52
11-15
Problem 11-13:
Solution:
$10,000 x .05 x 13 = $125
52
11-16
Problem 11-14:
Solution:
Bank Discount
Aug. 16 228 days
May 8 -128 80
100 days passed $3,120.00 x .09 x =
360
$3,120.00
180 – 100 = 80 days - 62.40
(discount period)
$3,057.60 proceeds
180
$3,000 x .08 x 360 = $120
$3,000 + $120 = $3,120 MV
11-17
Problem 11-16:
Solution:
Oct 11 284 days
Aug 8 - 220
64 days passed
120 – 64 = 56 days
(discount period)
11-18