1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process...

15
1-1

Transcript of 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process...

Page 1: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-1

Page 2: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-2

Chapter 11Chapter 11

Promissory Notes, Promissory Notes, Simple Discount Notes, Simple Discount Notes,

and The Discount and The Discount ProcessProcess

McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 3: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-3

• Differentiate between interest-bearing and noninterest-bearing notes

• Calculate bank discount and proceeds for simple discount notes

• Calculate and compare the interest, maturity value, proceeds, and effective rate of a simple interest note with a simple discount note

• Explain and calculate the effective rate for a Treasury bill

Promissory Notes, Simple Discount Notes, and the Discount Process#11#11

Learning Unit ObjectivesStructure of Promissory Notes; the Simple Discount Note

LU11.1LU11.1

Page 4: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-4

• Calculate the maturity value, bank discount, and proceeds of discounting an interest-bearing note before maturity

• Identify and complete the four steps of the discounting process

Promissory Notes, Simple Discount Notes, and the Discount Process#11#11

Learning Unit ObjectivesDiscounting and Interest-bearing Note before maturity

LU11.2LU11.2

Page 5: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-5

Structure of a Promissory NoteFigure 11.1

___________a. LAWTON, OKLAHOMA ______________________c.

__________________________b. AFTER DATE _______ PROMISE TO PAY TO

THE ORDER OF ___________________________________________d.

____________________________________________DOLLARS

PAYABLE AT ____________________________________

VALUE RECEIVED WITH INTEREST AT ______e. REGAL CORPORATION f.

NO. ______ DUE _____________________g.________________

TREASURER

a. Face value d. Payee g. Maturity dateb. Time e. Ratec. Date f. Maker

$10,000 October 2, 2004

Sixty days We

G.J. Equipment Company

Ten Thousand and 00/100 -------

Able National Bank

9%

114 December 1, 2004 J.M. Moore

Page 6: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-6

Simple Discount Note

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 loans maturity value

Page 7: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-7

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?

$10,000 x .10 x 90 = $250 360

$10,000 - $250 = $9,750Proceeds

Bank Discount

Bank DiscountRate

Page 8: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-8

Comparison

InterestI = Face Value (Principal) x R x TI = $10,000 x .10 x 90

360I = $250

Maturity ValueMV = Face Value + InterestMV = $10,000 + $250 = $10,250

ProceedsProceeds = Face Value Proceeds = $10,000

Simple Interest Note - Ch. 10 Simple Discount Note - Ch. 11

InterestI = Face Value (Principal) x R x TI = $10,000 x .10 x 90

360I = $250

Maturity ValueMV = $10,000

ProceedsProceeds = MV - Bank discount Proceeds = $10,000 - $250Proceeds = $9,750

Page 9: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-9

Comparison - Effective Rate

Rate = Interest Proceeds x TimeRate = $250

$10,000 x 90 360

Rate = 10%

Simple Interest Note - Ch. 10 Simple Discount Note - Ch. 11

Rate = Interest Proceeds x TimeRate = $250

$9,750 x 90 360

Rate = 10.26%

The effective rate for a simple discount note is higher than the stated rate, since the bank

calculated the rate on the face of the note and not on what Terrance received

Page 10: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-10

Table 11.1 - Comparison of simple interest note and simple discount note

Simple interest note (Chapter 10)

1. A promissory note for a loan with a term of usually less than 1 year. Example: 60 days

2. Paid back by one payment at maturity. Face value equals actual amount (or principal) of loan (this is not maturity value)

3. Interest computed on face value or what is actually borrowed. Example: $186.67

4. Maturity value = Face value + Interest Example: $14, 186.67

5. Borrower receives the face valueExample: $14,000

6. Effective rate (true rate is same as rate stated on note). Example: 8%

7. Used frequently instead of the simple discount note. Example: 8%

Simple discount note (Chapter 11)

1. A promissory note for a loan with a term of usually less than 1 year. Example: 60 days

2. Paid back by one payment at maturity. Face value equals maturity value (what will be repaid)

3. Interest computed on maturity value or what will be repaid and not on actual amount borrowed. Example: $186.67

4. Maturity value = Face valueExample: $14, 000

5. Borrower receives proceeds = Face value - bank discount. Example: $13,813.33

6. Effective rate is higher since interest was deducted in advance. Example: 8.11%

7. Not used as much now because in 1969 congressional legislation required that the true rate of interest be revealed. Still used where legislation does not apply, such as personal loans.

Page 11: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-11

Treasury BillsTerms of Purchase

91 days (13 Weeks)

182 days (26 Weeks)

or

1 Year

If you buy a $20,000 26 week Treasury

bill at 7%, how much will you pay

and what is the effective rate?

$20,000 x .07 x 26 = $700 52

Cost = $20,000 - $700 = $19,300

Effective Rate = $700 = 7.25% $19,300 x 26

52

Page 12: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-12

Discounting 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

Page 13: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-13

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 discountMarch 8 $5,000 270 days 9% 8% August 9

Date of Date of Date note discount note due

March 8 August 9 Dec. 3154 days before note is discounted

116 days

Bank waits

270 days total length of note

Page 14: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-14

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 discountMarch 8 $5,000 270 days 9% 8% August 9

What are Camille’s interest and maturity value? What are the discount period and bank discount? What are the proceeds?

I = $5,000 x .09 x 270 = $337.50 360

MV = $5,000 + $337.50 = $5,337.50

$5,337.50 x .08 x 116 = 137.59 360 $5,337.50 - 137.59 = $5,199.91

Calculation on next slide

Page 15: 1-1. 1-2 Chapter 11 Promissory Notes, Simple Discount Notes, and The Discount Process McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies,

1-15

Calculation of days without tableManual Calculation

March 31

-8

23

April 30

May 31

June 30

July 31

August 9

154

270 days - length of note

-154 days Camille held note

116 days bank waits

Table Calculation

August 9 221 days

March 8 -67 days

154 days passed before note is discounted

270 day note -154

116 discount pd.


McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill ...

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill ...

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill ...

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill ...

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, All Rights Reserved Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, All Rights Reserved Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

McGraw-Hill © 2006 The McGraw-Hill Companies, Inc. All rights reserved. 10-1 chapter McGraw-Hill © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill © 2006 The McGraw-Hill Companies, Inc. All rights reserved. 10-1 chapter McGraw-Hill © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill Science Newsroom - Macmillan/McGraw-Hill€¦ · McGraw-Hill Science Newsroom Primary Edition complements the McGraw-Hill Science 2000textbook series by offering one interactive

McGraw-Hill Science Newsroom - Macmillan/McGraw-Hill€¦ · McGraw-Hill Science Newsroom Primary Edition complements the McGraw-Hill Science 2000textbook series by offering one interactive

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin.

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin.

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin.

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies ...

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies ...

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1 The Sociological Perspective McGraw-Hill © 2005 The McGraw-Hill Companies, Inc.

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1 The Sociological Perspective McGraw-Hill © 2005 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin.

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin.

McGraw-Hill©The McGraw-Hill Companies, Inc., 2000 SUBNETTING.

McGraw-Hill©The McGraw-Hill Companies, Inc., 2000 SUBNETTING.

Correlated to Macmillan/McGraw-Hill€¦ · Mondo Bookshop - Grade K correlated to Macmillan/McGraw-Hill Treasures. Mondo Bookshop Macmillan/McGraw-Hill Treasures. Mondo Macmillan/McGraw-Hill

Correlated to Macmillan/McGraw-Hill€¦ · Mondo Bookshop - Grade K correlated to Macmillan/McGraw-Hill Treasures. Mondo Bookshop Macmillan/McGraw-Hill Treasures. Mondo Macmillan/McGraw-Hill

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, All Rights Reserved.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, All Rights Reserved.

© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin.

© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin.

Chapter 10 · Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 $ Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., ...

Chapter 10 · Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 $ Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., ...

Chapter Seventeen PROMISSORY NOTES, SIMPLE DISCOUNT NOTES, AND THE DISCOUNT PROCESS Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Chapter Seventeen PROMISSORY NOTES, SIMPLE DISCOUNT NOTES, AND THE DISCOUNT PROCESS Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Local Marketing in Mature Markets Chapter Eight. Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

Local Marketing in Mature Markets Chapter Eight. Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

McGraw-Hill The McGraw-Hill Companies, Inc., 2004

McGraw-Hill The McGraw-Hill Companies, Inc., 2004

Irwin/McGraw Hill The McGraw-Hill Companies, Inc., 2000 · Slides by Matthew Will Chapter 2 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000. Irwin/McGraw Hill ... " Tools

Irwin/McGraw Hill The McGraw-Hill Companies, Inc., 2000 · Slides by Matthew Will Chapter 2 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000. Irwin/McGraw Hill ... " Tools

McGraw-Hill Ryerson Copyright © 2006 by The McGraw-Hill ...

McGraw-Hill Ryerson Copyright © 2006 by The McGraw-Hill ...