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    Discounted Promissory Notes 4.2

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    Brynne Urrera
    This document discusses discounted promissory notes, which are short-term loans where the interest is collected up front. The bank deducts the interest, called the bank discount, from the principal amount to determine the proceeds given to the borrower. The rate of discount is used to calculate the bank discount. The true interest rate considers the bank discount paid relative to the proceeds actually received. Examples are provided to demonstrate calculating proceeds, bank discount, and true interest rate on discounted promissory notes.

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    Discounted Promissory Notes 4.2

    Uploaded by

    Brynne Urrera
    414 views11 pages
    This document discusses discounted promissory notes, which are short-term loans where the interest is collected up front. The bank deducts the interest, called the bank discount, from the principal amount to determine the proceeds given to the borrower. The rate of discount is used to calculate the bank discount. The true interest rate considers the bank discount paid relative to the proceeds actually received. Examples are provided to demonstrate calculating proceeds, bank discount, and true interest rate on discounted promissory notes.

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    This document discusses discounted promissory notes, which are short-term loans where the interest is collected up front. The bank deducts the interest, called the bank discount, from the principal amount to determine the proceeds given to the borrower. The rate of discount is used to calculate the bank discount. The true interest rate considers the bank discount paid relative to the proceeds actually received. Examples are provided to demonstrate calculating proceeds, bank discount, and true interest rate on discounted promissory notes.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    414 views11 pages

    Discounted Promissory Notes 4.2

    Uploaded by

    Brynne Urrera
    This document discusses discounted promissory notes, which are short-term loans where the interest is collected up front. The bank deducts the interest, called the bank discount, from the principal amount to determine the proceeds given to the borrower. The rate of discount is used to calculate the bank discount. The true interest rate considers the bank discount paid relative to the proceeds actually received. Examples are provided to demonstrate calculating proceeds, bank discount, and true interest rate on discounted promissory notes.

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    Business Math

    Discounted Promissory Notes


    Section 4-2
    Discounted Promissory Notes-Goals
    Calculate the interest and proceeds for
    discounted promissory notes
    Calculate the true rate of interest on a
    discounted promissory note
    Discounted Promissory Notes
    Banks and other lenders may lend money to
    businesses and people for short periods of
    time, such as 30, 60, or 90 days.
    These loans are called short-term loans.
    When a bank makes a short-term loan, it
    may require the borrower to sign a note and
    pay the interest when the loan is made.
    Discounted Promissory Notes
    When interest is collected in advance, it is
    known as a bank discount.
    Because the interest is paid in advance, the
    note itself does not show any interest rate,
    and it is called a noninterest-bearing note.
    Discounted Promissory Notes
    The bank collects the bank discount by deducting
    it from the principal, or face, of note.
    The amount the borrower gets is the principal of
    the note less the discount.
    When the loan is due, only the principal of the
    note is paid.
    Obtaining a loan in this way is known as
    discounting a note.
    Discounted Promissory Notes
    The percent of discount charged by the bank
    is the rate of discount.
    The amount of money that the borrower
    gets is the proceeds.

    Principal × Rate of Discount = Bank Discount

    Principal – Bank Discount = Proceeds


    Discounted Promissory Notes
    A bank discounted $9,600 noninterest-
    bearing note for Matt at 10% interest for 9
    months. Find the proceeds of the note that
    Matt receives.
    Discounted Promissory Notes
    When you discount your own noninterest-bearing
    note, you pay a rate of interest based on the
    principal.
    However, you do not get the full principal because
    interest is deducted in advance.
    To find the true rate of interest you paid, you must
    divide the interest paid (bank discount) by the
    amount you actually received (proceeds).
    True Rate of Interest = Interest ÷ Actual Amount Borrowed
    (Bank Discount) (Proceeds)
    Discounted Promissory Notes
    Michael signed a $25,000 noninterest
    bearing note on March 17. He discounted
    the note at 14% and paid the principal back
    6 months later. He received $23,250 as
    proceeds. What true rate of interest, to the
    nearest tenth of a percent, did Michael pay
    on the note?
    Discounted Promissory Notes
    Your bank discounted your 4-month,
    $2,600, noninterest bearing notes. The
    discounted rate was 12%. You received
    $2,496 as proceeds. What true rate of
    interest, to the nearest tenth of a percent, did
    you pay on the note?
    Discounted Promissory Notes
    Homework
    Pg 142/ 11-19 odds, 20-22

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