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BANK
DISCOUNT
 Bank Discount

A bank discount is an interest computed

on the maturity value of the loan and is
deducted from that amount at loan date to
determine the net amount to be received by
the borrower. Simply stated, the amount of
loan applied for at loan date is the maturity
value of the loan. The bank discount is
deducted from that amount to arrive at the
proceeds – the amount the borrower is to
received.
 Bank Discount
In computing for the bank discount, three
factors are being considered: maturity value,
bank discount rate and time. In this, bank
discount rate is referred to as discount rate or
rate and bank discount as discount.

The maturity value is the amount applied for

by the borrower on loan date. This is the same
amount that the debtor is supposed to pay at a
maturity date.
 Bank Discount
The bank discount rate, expressed as a
percentage, is converted to a decimal for
computation purposes. Unless otherwise stated,
the bank discount rate is an annual rate.

The time expressed in years or fractional part of

a year, is the period between the loan and
maturity date.
 Bank Discount
Bank Discount = Maturity Value x Discount Rate x Time
BD = MV x R x T

Proceeds = Maturity Value – Bank Discount

P = MV – BD

Effective Rate of a Bank Discount Note

Effective interest rate = Bank Discount
Proceeds x Time
 Bank Discount

Illustration: Stephanie availed of a P245,000 loan

at 14% discount rate for 9 months. Find the bank
discount and proceeds of the loan. Bank discount is
the product of the maturity value, discount rate and
time.

BD = MV x DR x T
BD = 245,000 x 14% x 9/12 (or 245,000 x .14 x .75)
BD = 25,725
 Bank Discount
Finding the Proceeds
On loan date, Stephanie did not receive the entire
P245,000. The bank discount of P25,725 had to be
deducted as interest in advance.

Proceeds = Maturity Value – Bank Discount

P = 245,000 – 25,725
P = 219,275
Effective Rate of a Bank Discount Note

In a simple interest note, the borrower receives

the full face value, whereas with a bank discount
note the borrower receives only the proceeds.
Because proceeds are less than the face value, the
stated discount rate is not the true or effective rate
of the note.

Effective interest rate = Bank Discount

Proceeds x Time
 Effective Interest Rate
Illustration: What is the effective rate of a bank
discount note for P350,000, at a bank discount rate of
14%, for a period of 6 months? To find the effective
interest rate, the bank discount and proceeds should be
computed first.

BD = Face Value x Discount Rate x Time

BD = 350,000 x 14% x 6/12 (350,000 x .14 x .5)
BD = 24,500
 Effective Interest Rate
P = Face Value – Bank Discount
P = 350,000 – 24,500
P = 325,500

Effective Interest Rate = Bank Discount/Proceeds x Time

Effective Interest Rate = 24,500_____
325,500 x .5
= 24,500
162,750
Effective Interest Rate = .15053 or 15.05%