Bank Discount & Promissory Notes

CHAPTER 3: BANK DISCOUNT AND PROMISSORY NOTES
Bank Discount
Bank discount : The charges that bank deduct from a loan in advance/interest in
advance.
Proceeds : The net amount the borrower receives after the bank deduct it charges.
Maturity value : The amount borrowed (before deducting).
Computing Bank Discount and Proceeds
𝐷 = 𝑆𝑑𝑡
where D = Bank Discount

S = Maturity Value
d = Simple Discount Rate
t = time (discount period, in year)
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑆 − 𝐷
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑆 − 𝑆𝑑𝑡
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑆(1 − 𝑑𝑡)
Example
1. Kiki borrows RM2,800 from a bank at a discount rate of 5% for five months. Find (i) the bank
discount, and (ii) the proceeds received.
RM58.33; RM2741.67
2. Ah Chong borrowed RM12,000 for 60 days and he was charged a bank discount of 9.5%.
Find the bank’s discount and the proceeds.
RM190; RM11810
3. Koko borrows RMX for 2 years from a bank that charges a discount rate of 7% and the bank
discount given is RM60. Find (i) the value of X, and (ii) the proceeds.
RM428.57; RM368.57
4. If Badar needs RM7500 now, how much should he borrow from a bank which charges 10%
discount rate for 3 years.
RM10714.29
5. If Aman would like to have RM5,000 now, how much should he lend from a bank that
charges at 10% bank discount rate for 1 year?
RM5555.56
6. Suraya borrowed some money from Bank X which charges a bank discount rate of 12% for
150 days. If the proceed received is RM2,500, find the value of the discount charged.
RM131.58
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3.3 Promissory Notes
• Moneylenders usually require the borrower, to sign a note. This note states that the
borrower will repay a certain sum of money at a fixed time in the future that usually includes
the rate of interest. This note is called a promissory notes and it is usually a short term
loan (months or days).
• Characteristics:
i) Principal: Amount of money borrowed (or face value of the notes)
ii) Time/Term: Length of time that the money is borrowed
iii) Date: The date that the note is issued
iv) Rate: The simple interest rate (if any, if no interest rate, thus maturity value = face value)
v) Maker: The person/ company issuing the note and borrowing the money
vi) Payee: The person/ company extending the credit (give the loan)
• Maturity value and maturity date

i) Maturity date: the date loan must be paid
▪ If given in days – use exact method
▪ If given in months – use approximate time
ii) Maturity value: the amount (principal plus interest(if any))

▪ Face value + interest due
Example of promissory note:
RM10,000 15 March 2010
90 days after date, I promise to pay to Mr.GohHuat

Ringgit Malaysia: Ten Thousand only for value
received with interest at 4% per annum, both
principal and interest payable in Malaysian
currency.
No: 7186
Due: 15 June 2010
Mr Kim Liang
Lot 435, Taman Sentosa,
55000 Klang
Example of promissory notes
Example
1. Find the maturity date and maturity value for 60 days promissory note with a face value of
RM2,500 at a simple interest rate of 14% per annum issued on 10th February 2010.
11 April 2010; RM2558.33
2. A promissory note dated 23 March 2009 reads ‘nine months form date, I promise to pay
RM2,500.00 with a simple interest rate of 5% per annum. Find the maturity date and
maturity value.
23 December 2009; RM2593.75
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3. A promissory note with a face value of RM6,000 at a simple interest rate of 18% per annum
has a maturity value of RM6,216. Find the term of the note.
0.2
4. The maturity value of a 90-days promissory note is RM4,080. If the face value of the note is
RM4,000, find the interest rate charged by the payee.
8%
Simple Interest Rate Equivalent to Bank Discount Rate
Two rates is said to be equivalent if the two rates yield the same present value for a future
value.
Therefore,
𝑑
𝑟=
1 − 𝑑𝑡
𝑟
𝑑=
1 + 𝑟𝑡
Note: r is used to determine equivalent simple interest rate

d is used to determine equivalent bank discount rate
Example
1. A bank discount note of RM9,000 due in three months using a discount rate of 5%. Find the
equivalent simple interest rate that is charged by the bank.
5.06%
2. What discount rate should a lender charges to earn a simple interest rate of 7% on a 6-
month loan?
6.76%
3. A bank discount note of RM16,000 due in 5 months. Using a bank discount rate of 4%, find
the equivalent simple interest rate charged by the bank.
4.07%
Exercises in text book: pg. 158-161 (no. 1, 2(a), 4(a), 6, 7, 8, 9,10,12,13, 14, 20, 23)
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CHAPTER 3: BANK DISCOUNT AND PROMISSORY NOTES

Computing Bank Discount and Proceeds

where D = Bank Discount

• Maturity value and maturity date

ii) Maturity value: the amount (principal plus interest(if any))

Example of promissory note:

RM10,000 15 March 2010

90 days after date, I promise to pay to Mr.GohHuat

Example of promissory notes

Simple Interest Rate Equivalent to Bank Discount Rate

Note: r is used to determine equivalent simple interest rate

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