Chapter 11
 
an interest-bearin! note beore maturity
• "dentiy and complete the our steps o
the discountin! process
Promissory Notes, Simple Discount  Notes, and the Discount Process#11 Learning Unit Objectives Discounting and Interest-bearing Note
before maturity LU11.2
 bearin! notes
discount notes
 proceeds, and eective rate o a simple interest note
$ith a simple discount note
• %&plain and calculate the eective rate or a Treasury bill
Promissory Notes, Simple Discount  Notes, and the Discount Process#11 Learning Unit Objectives Structure of romissory Notes! t"e
Sim$e Discount Note LU11.1
 
 *********** a) +T.N, ./+0. ********************** c)
 **************************  b)  (T% DT% ******* P."S% T. P3 T.
T0% .D% .( ******************************************* d)
P34+% T ************************************ 
5+6% %C%"5%D "T0 "NT%%ST T ****** e) %7+ C.P.T".N )
 N.) ****** D6% ********************* !)  **************** 
 T%S6% 
 b) Time e) ate
ble National 4ank 
 
&"ic" t"e $oan interest is
deducted in advance
ban(s deduct in advance
'an( discount rate - t"e
deducts its discount from t"e
$oans maturity va$ue
 
ebster 'an(. ,"e ban( discounted t"e note at 1/3.
"at roceeds does ,errance receive4
1/0/// 5 /.1/ 5 / 6 27/   89/
1/0/// - 27/ 6 0:7/ roceeds
'an( Discount
the discount to the bank)
 
Discount Note
" B 81E:)A:
aturity 5alue
Proceeds
Simple "nterest Note - Ch) 19 Simple Discount Note - Ch) 11
"nterest
" B 81EA)A:
aturity 5alue
Proceeds B 81#,E1#)##
" B 81E:)A:
aturity 5alue
Proceeds
Simple "nterest Note - Ch) 19 Simple Discount Note - Ch) 11
"nterest
aturity 5alue
 
ate B 81EA)A:
81',999 & A9   #A9
ate B E?
Simple "nterest Note - Ch) 19 Simple Discount Note - Ch) 11
ate B "nterest   Proceeds & Time
ate B 81EA)A:
,"e effective rate for a sim$e discount note is
"ig"er t"an t"e stated rate0 since t"e ban(
ca$cu$ated t"e rate on t"e face of t"e note and not
on &"at ,errance received
note and simple discount note
Sim$e interest note ;<"ater 1/=
1) promissory note or a loan $ith a term o usually
less than 1 year) %&ampleH A9 days
2) Paid back by one payment at maturity) (ace value
e<uals actual amount or principal o loan this is not
maturity value
 borro$ed) %&ampleH 81EA)A:
') aturity value B (ace value F "nterest %&ampleH 81', 1EA)A:
@) 4orro$er receives the ace value %&ampleH 81',999
A) %ective rate true rate is same as rate stated on
note) %&ampleH E?
note) %&ampleH E?
Sim$e discount note ;<"ater 11=
1) promissory note or a loan $ith a term o usually
less than 1 year) %&ampleH A9 days
2) Paid back by one payment at maturity) (ace value
e<uals maturity value $hat $ill be repaid
#) "nterest computed on maturity value or $hat $ill
 be repaid and not on actual amount borro$ed)
%&ampleH 81EA)A:
@) 4orro$er receives proceeds B (ace value - bank
discount) %&ampleH 81#,E1#)##
in advance) %&ampleH E)11?
interest be revealed) Still used $here le!islation does
not apply, such as personal loans)
 
Simple discount rate o >)@?
#)hat is the proceeds to the borro$erI
')hat is the eective rateI "s it >)@?I
 
Simple discount rate o >)@?
4ank discount B aturity value & 4ank discount rate & Time
4ank discount B 12,999 & 9)9>@ & A9=#A9 B 81>9
Proceeds B aturity value G 4ank discount
Proceeds B 812,999 - 81>9 B 811,E19
%ective rate B "nterest 81>9
 ***************** B ************ B>)A@?
 
18 &ee( ,reasury
Bffective ate 6 2// 6 A.193 0A// 5 18
  72
Effective rate = = 5.06%  $125 _   $9,875 x 13
52
1#-$eek Treasury bill)
"nterest earned
 
 $10,000.00 - $9,976.10
Treasury bill or 819,999 or 1# $eeksJ
Discount value in buyin! bill B 82#)>9
(ind the eective rate o Treasury bill)
 
Ste 2. <a$cu$ate t"e discount eriod
;time t"e ban( "o$ds note=
Ste 8. <a$cu$ate t"e ban( discount
Ste . <a$cu$ate t"e
 Note beore aturity
<ami$$e i$son so$d t"e fo$$o&ing romissory note to t"e ban(C
Date of >ace *a$ue Lengt" of Interest 'an( Discount Date of     note of note note rate rate discount
 March 8 $2,000 185 days 10% 9% Aug 
Date o Date o Date   note discount note due
arch E u!ust > Sept) >
31 days
 Bank waits
 
 Note beore aturity
<ami$$e i$son so$d t"e fo$$o&ing romissory note to t"e ban(C
Date of >ace *a$ue Lengt" of Interest 'an( Discount Date of     note of note note rate rate discount
 March 8 $2,000 185 days 10% 9% Aug 
"at are <ami$$eEs interest and maturity va$ue4 "at are t"e
discount eriod and ban( discount4 "at are t"e roceeds4
I 6 20/// 5/ .1/ 5 1A7 6 1/2.:A   89/
)* 6 20/// F 1/2.:A/ 6 201/2.:A
201/2.:A 5 /./ 5 81 6 19.8/   89/ 21/2.:A + 19.8/ 6 20/9A.A
<a$cu$ation
 Manual Calculation
)arc" 81
  81 days ban( &aits
1A7 day note
 Au'. 16 228 a" a 8 -128   100 a" *a""e
180 + 100 = 80 a"   (i"c!ut *eri!)
$3,000 x .08 x = $120
$3,000 $120 = $3,120 (aturit aue)
180 360
Bank Discount
 
$3,057.60 *r!cee"
 80 360
rate
ct 11 28& a"  Au' 8 - 220   6& a" *a""e
120 + 6& = 56 a"   (i"c!ut *eri!)$5,000 x .08 x 120
360 = $133.33
"nterest earned on ori!inal note
4ank discountB 8@,1##)## & 9)9> & @A=#A9 B 8:1)E:
Proceeds B 8@,1##)## G :1)E: B 8@,9A1)'A