After reading the material in this chapter, you should be able to: Differentctiiate between interest-bearing and non-interest-bearing notes; calculate bank discount and proceeds for simple discount notes; calculate and compare the interest, maturity value, proceeds, and effeve rate of a simple interest note with a simple discount note; explain and calculate the effective rate for a Treasury bill;...
Trang 1Chapter Eleven
Promissory Notes, Simple
Discount Notes, and The Discount Process
Trang 2Learning unit objectives
LU 11-1: Structure of Promissory Notes; the Simple Discount Note
notes
effective rate of a simple interest note with a simple discount note
LU 11-2: Discounting an Interest-Bearing Note before Maturity
discounting an interest-bearing note before maturity
Trang 3Structure of a Promissory Note
Trang 4Simple Discount Note Terminology
Simple Discount Note - A note in which the loan interest is deducted in advance Bank Discount - The interest that banks deduct in advance.
Bank Discount Rate - The percent of interest.
Proceeds - The amount the borrower receives after the bank deducts its
discount from the loan’s maturity value
Maturity Value – The total amount due at the end of the loan.
Trang 5Simple Discount Note
Terrance Rime borrowed $10,000 for 90 days from Webster Bank The
bank discounted the note at 10% What proceeds does Terrance
receive?
$10,000 x 10 x 90 = $250
360
$10,000 - $250 = $9,750
Proceeds
Bank Discount
Rate
Example:
Bank Discount
Trang 6Comparison of simple interest note and simple
discount note
Trang 7Comparison of simple interest note and
simple discount note
Scenario
Face value =
$18,000
Interest rate = 8%
60 days
Trang 813
52
Treasury Bills
A Treasury bill is a loan to the federal government.
Terms of Purchase: 91 days (13 weeks), or 1 year
Example: If you buy a $10,000, 13-week Treasury bill at 8%,
how much will you pay, and what is the effective rate?
Cost = $10,000 $200 = $9,800
Effective rate = $200 =
8.16%
Trang 9Discounting an Interest-Bearing
Note before Maturity
Step 1 Calculate the interest and maturity value
Step 2 Calculate the discount period (time the bank holds note)
Step 3 Calculate the bank discount
Step 4 Calculate the proceeds
Trang 10Discounting an Interest-Bearing
Note before Maturity
Roger Company 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 6% 5% August 9
Trang 11Discounting an Interest-Bearing
Note before Maturity
What are Roger’s interest and maturity value?
MV = $2,000 + $61.67 = $2,061.67
360
$2,061.67 – $8.80 = $2,052.87
Calculation
on next slide
What are the discount period and bank discount?
What are the proceeds?
I = $2,000 x 06 x 185 = $61.67
360
Roger Company 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 6% 5% August 9
Trang 12Calculation of days without table
Manual Calculation
8
23
August 9
154
185 days length of note 154 days Roger held note
31 days bank waits
Table Calculation
Days passed before note is discounted 154
154
Discount period 31