MAT112 Business Mathematics

CHAPTER 2

BANK DISCOUNT AND PROMISSORY NOTES

LEARNING OBJECTIVES

After completing this chapter, students should be able to:

 explain the concept of a promissory note
 determine the type of a promissory note
 list the main characteristics of a promissory note
 compute the face value and maturity value of promissory note
 explain the concept of bank discount
 compute the amount of bank discount and proceed
 explain the concept of discounting promissory note
 find the simple interest rate equivalent to a discount rate.

PROMISSORY NOTE

 Issued on short-term basis.

 Debt instrument.
 Negotiable document or instrument.

Example of Promissory Note

 Definition: A written promise made by one person or party to repay a loan or debt on a specified
future date to another person or party.

 Types: (a) Interest Bearing Notes

 Interest will be charged.
 The rate of interest is stated on the note (usually simple interest rate).
(b) Non-Interest Bearing Notes
 No interest will be charged.

 Characteristics: (a) The Maker / Promisor / Obligor

 The person who borrows money and signs the note.
(b) The Payee / Promisee / Obligee
 The person who lends money and receives/keeps/hold the note.
(c) Date of the Note (dd/mm/yy)
 The date on which the note is made.

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(d) Term of the Note (in years / months / weeks / days)

 The length of time until the note is due for payment.
(e) Face Value / Principal, P (in RM)
 The amount stated on the note.
(f) Maturity Value / Sum, S (in RM)
 The total of money which the payee will receive on the maturity date.
(g) Maturity Date (dd/mm/yy)
 The date on which the maturity value is due.

 Formula: (a) Maturity Value/Sum, S (in RM)

Maturity Value  Face Value  Interest
S  P  I
 Interest Bearing Notes
S  P  Prt
S  P 1  rt 

MaturityValue  Face Value

S  P  Non - Interest Bearing Notes

(b) Maturity Date (dd/mm/yy)

Maturity Date  Date of the note  Term of the note

(c) Interest, I (in RM)

I  Prt

(d) Date of the Note (dd/mm/yy)

Date of the note  Maturity Date - Term of the note

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 Example 1: The Mutiara Auto Company had a note dated 2 March 2023 for RM6555 with a simple
interest of 6.5% per annum. The term of the note was 180 days. Find
(a) the maturity date
(b) the maturity value.

Solution:

P = 6555 r = 6.5% t = 180 days S=?

02/03/2023 ?

(a) Exact Time:

Mar: 29 (31 – 2)
Apr: 30
May: 31
Jun: 30
July: 31
Aug: 29
180 days

Maturity date = 29/08/2023

(b)
S  P1  rt 
  180 
 65551   0.065  
  360 
 RM6768.04

Example 2: Mr. Amar received a note dated 8 August 2021 with a face value of RM2000, a term of
120 days and an interest rate of r%. The maturity value was RM2081.67. Determine
(a) the maturity date of the note
(b) the interest rate, r .

Solution:

P = 2000 r=r% t = 120 days S = 2081.67

08/08/2021 ?
(a) Exact Time: (b)

Aug: 23 (31 – 8)
Sep: 30
Oct: 31
Nov: 30
Dec: 6
120 days

Maturity date = 06/12/2021

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Example 3: Afiful received a 60-day promissory note dated 20 September 2020 from Afefah. The
simple interest rate for this note was 6% per annum and its maturity value was
RM6250.
(a) Who is the payee of this note?
(b) Find the face value of the note.

Solution:

P=? r = 6% t = 60 days S = 6250

20/09/2020 ?

(a)

(b)

Example 4: Ain received a four-month promissory note with a face value of RM9000 at a simple
interest rate r%. The note matured on 10 November 2019 with a maturity value of
RM9485. Calculate
(a) the date of the note
(b) the simple interest rate, r .

Solution:

P = 9000 r=r% t = 4 months S = 9485

? 10/11/2019
(a) Date of the note = 10/11/2019 – 4 months
= 10/07/2019

(b)
S  P1  rt 
  4 
9485  90001   r  
  12 
r  16.17%

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Example 5: Sharina received a 120-day note with a face value of RM7000 at a simple interest rate
4.55%. The note matured on 15 May 2022. Calculate the date of the note and the
maturity value.

Solution:

P = 7000 r = 4.55% t = 120 days S=?

? 15/05/2022
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BANK DISCOUNT / DISCOUNT

 Also known as Interest in Advance.

 Applied in short term loan.
 It calculate based on the final amount (maturity value or sum, S )
Simple Interest Bank Discount/Interest in Advance
Amount of Loan RM 10,000 RM 10,000
Interest Rate r  10% d  10%
Term t  1 year t  1 year
Amount of Interest I  10,000  0.1  1  RM 1,000 I  D  10,000  0.1  1  RM 1,000
Amount Received P  RM 10,000 H  10,000  1,000  RM 9,000
Amount Paid S  10,000  1,000  RM 11,000 S  RM 10,000

 Formula: (a) Bank Discount/Discount/Interest in Advance, D (in RM)

D  Sdt

S  Amount of Maturity Value or Sum (in RM)

d  Discount Rate (in %)
t  Term of Discount (in years/months/weeks/ days)

(b) Proceeds, H (in RM)

 The net amount received by the borrower or maker.

Proceeds  Maturity Value  Bank Discount

H  S  D
H  S  Sdt
H  S 1  dt 

 Note: Present Value (Amount received by the borrower)

 Simple Interest : P
 Bank Discount : H

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 Example 1: Aizad borrows RM5500 for six months from a lender who charges a discount rate of
9%. Find
(a) the discount
(b) the proceeds.

Solution:

D=?,H=? d = 9% t = 6 months S = 5500

(a)
D  Sdt
6
 5500  0.09 
12
 RM247.50

(b)
H  S1 - dt 
H  S-D
  6 
 5500 - 247.50 OR  55001   0.09  
  12 
 RM5252.50
 RM5252.50

Example 2: An obligation of RM8400 is due in 6 months. What is the present value of this
obligation at a bank discount rate of 9%?

Solution:

H=? d = 9% t = 6 months S = 8400

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Example 3: A businessman needs RM14000 for four months. What should the size of the loan if
his bank charges a discount rate of 9.5%?

Solution:

H = 14000 d = 9.5% t = 4 months S=?

H  S1 - dt 
  4 
14000  S 1   0.095  
  12 
 S0.968333333 
S  RM14457.83

Example 4: Sara needs RM8000 on 10 May 2018. She plans to repay the money on 17
September 2018. What should the size of her loan if the bank charges a discount rate
of 10.5%?

Solution:

H = 8000 d = 10.5% S=?

10/05/2018 17/09/2018

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Example 5: Afrina borrowed RM4500 for 85 days from a lender who charges a discount rate of
3%. She repaid the loan on 24 June 2021. Find
(a) the discount date
(b) the proceeds.

Solution:

H=? d = 3% t = 85 days S = 4500

? 24/06/2021

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DISCOUNTING PROMISSORY NOTE

 Promissory note can be sold to a bank before its maturity date if the holder is in need of cash.
 Discounting the note  the payee is selling the note to the bank because need cash.
 Discount date (dd/mm/yy)  the date the note is discounted or the date selling the note.
 Proceeds (in RM)  the amount received by the payee on the date of discounting.
 Formula: (a) Find the Maturity Value or Sum, S (in RM)

MaturityValue  Face Value  Interest Due

S  P  I
 Interest Bearing Notes
S  P  Pr t
S  P1  rt 

MaturityValue  Face Value

S  P  Non - Interest Bearing Notes

(b) Find the Bank Discount, D (in RM)

D  Sdt
S  Amount of Maturity Value or Sum (in RM)
d  Bank Discount Rate (in %)
t  The Discount Period or Term of Discount
(the no. of days between the discounted value and the maturity date)

(c) Compute the Proceeds, H (in RM)

Pr oceeds  MaturityValue  Bank Discount

H  S  D
H  S  Sdt
H  S1  dt 

(d) Discount Period / Discount Term  Discount Date to Maturity Date

Length of time kept / hold / saved the note  Date of Note to Discount Date

Discount Date  Maturity Date  Discount Period

r% t = Term of the note

P D, H I, S

Date of the note Discount Date Maturity Date

t = Length of time kept/hold/saved the note d% t = Discount Period/Term

(payee)

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SIMPLE INTEREST RATE (r %) EQUIVALENT TO BANK DISCOUNT RATE (d %)

 Equivalent if the two rates give the same present value for an amount due in the future.

or P  S 1  rt 
S 1
 r % simple interest rate  Present Value, P 
1  rt

d % bank discount rate  Present Value, H  S 1  dt 

 Formula: (a) Q: Find the interest rate that is equivalent to the given bank discount rate.

d
r
1  dt
(b) Q: Find the discount rate that is equivalent to the given simple interest rate.

r
d
1  rt

 Example 1: A bank discount all short-term 60 days loan at 14%. What is the equivalent simple
interest rate?

Solution:

d
r
1  dt
0.14

 60 
1   0.14  
 360 
 14.33%

Example 2: Find the discount rate should Maybank charge to earn an interest rate of 20% on a 6-
month loan.

Solution:

r
d
1  rt
0.2

 6 
1   0.2  
 12 
 18.18%

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EXERCISES

1. Krepek Auto Company had a note dated 02 July 2021 for RM5555 with a simple interest of 6% per
annum. The term of the note was 180 days. If the company discounted the note on 30 September
2021 at a bank that charged a discount rate of 5%, find
(a) the maturity value
(b) the discount period
(c) the proceeds
(d) a discount rate that is equivalent to the 6% simple interest rate.

Solution:

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2. Mr. Qayyum received a note dated 08 August 2019 with a face value of RM2000, a term of 120 days
and an interest rate of r%. The maturity value was RM2081.67. On 13 September 2019, he
discounted the note at a discount rate of 5.5%. Determine
(a) the maturity date of the note
(b) the length of time he kept the note
(c) the discount period
(d) the interest rate, r
(e) the proceeds received by Mr. Qayyum
(f) the simple interest rate that is equivalent to the discount rate given.

Solution:

*Important note: If t in days, then use Banker’s Rule

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