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Discounting A Interest Bearing Note

Morrison Pet Supply Company borrowed $20,000 at a 7% interest rate for 90 days from Chavez Bank to purchase a truck. Chavez Bank then discounted the note to George W's Investment Bank 30 days later at a 9% discount rate. This generated $305.25 in bank discount and proceeds of $20,044.75 for Chavez Bank. Discounting loans allows banks to recycle funds and make profits from interest, though it requires responsible lending and borrowing to avoid problems if repayments are missed.

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6K views

Discounting A Interest Bearing Note

Morrison Pet Supply Company borrowed $20,000 at a 7% interest rate for 90 days from Chavez Bank to purchase a truck. Chavez Bank then discounted the note to George W's Investment Bank 30 days later at a 9% discount rate. This generated $305.25 in bank discount and proceeds of $20,044.75 for Chavez Bank. Discounting loans allows banks to recycle funds and make profits from interest, though it requires responsible lending and borrowing to avoid problems if repayments are missed.

Uploaded by

Mary
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Discounting an Interest Bearing Note

Morrison Pet Supply Company Discounting an Interest Bearing Note December 31, 20XX
Marshall Morrisons Pet Supply Company borrows $20,000 at 7% interest rate for 90 days from Chavez Bank to purchase a Chevy truck to deliver pet supplies to local pet stores. Chavez Bank discounts the note 30 days later at a 9% bank discount rate to George Ws Investment Bank. 1. $20,000 X.07 X 90/360 = $350 Interest 2. $20,000 + $350 = $20,350 Maturity value 4. $20,350 X .09 X 60/360 = $305.25 Bank discount 5. $20,350 $305.25 = $20,044.75 Proceeds

Systematic Instructions
1. Formula: Principle X Rate X time = Interest. Multiply the principle time the rate time the total days in the note divided by 360 to get the amount of interest. 2. Formula: Principle + Interest = Maturity Value. Add the Principle to the interest from step one to get the maturity value. 3. Calculate the remaining time in the loan after the date of the discount.

4. Formula: Maturity Value X Bank Discount Rate X Bank Discount Period = Bank Discount. Multiply the maturity value time the bank discount rate times the number of days left after the discount divide by 360 to get the bank discount. 5. Formula: Maturity Value Bank Discount = Proceeds. Subtract the bank discount amount from the maturity value to get the proceeds of the loan which will go to Chavez Bank. Note: By discounting this loan to a larger investment bank Chavez Bank can now use the money to lend to another individual and receive its interest at a faster rate, which is how Chavez Bank makes its profit. Without this line of income Chavez Bank would have to charge its customers higher fees for other banking services. They would have a more limited amount of funds to lend to local businesses for capital improvements and future business investments. Morrison Pet Supply Company must now pay George Ws Investment Bank back for the loan. The larger investment bank will now assume the responsible for collecting the note from Morrison Pet Supply Company. A prime example of this type of behavior is when a small bank sells it mortgages to a larger investment bank. Problems in the system only arise when the borrower cannot make the loan repayments on time, so care and responsible must be exercised by both the lender and the borrower in order to ensure that the borrower is not making a loan that they cannot afford to honor in the future. MJC Revised 1/2012 Page 1

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