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Bank Discount and Promissory Notes

This document discusses promissory notes, bank discount, and discounting promissory notes. It defines promissory notes as written debts that can be used for borrowing or lending. It explains that bank discount is interest charged in advance for short-term loans, reducing the proceeds received. When a promissory note is discounted before maturity, the holder receives the proceeds by selling it to a bank for the maturity value minus the bank discount. The discount rate and an equivalent simple interest rate are also defined.

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Nurain Sharina
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46 views

Bank Discount and Promissory Notes

This document discusses promissory notes, bank discount, and discounting promissory notes. It defines promissory notes as written debts that can be used for borrowing or lending. It explains that bank discount is interest charged in advance for short-term loans, reducing the proceeds received. When a promissory note is discounted before maturity, the holder receives the proceeds by selling it to a bank for the maturity value minus the bank discount. The discount rate and an equivalent simple interest rate are also defined.

Uploaded by

Nurain Sharina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

BANK DISCOUNT &

PROMISSORY NOTES
PREPARED BY : NUR ANIS FATIHAH BINTI RAZALLI
OUTLINE
• Promissory notes
• Bank Discount
• Discounting Promissory notes
• Simple Interest Rate Equivalent to Bank Discount Rate
Promissory Notes
• Promissory notes or notes in short are debt instruments.
• It can be used by anyone who want to borrow or to lend money.
• It is also an important negotiable instruments used in the economy.
• A promissory note is 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
• There are two types of promissory notes :
- interest bearing notes
- non-interest bearing notes
• For interest bearing note, the rate of interest is stated on the note
and is usually a simple interest rate.
• The main features of a promissory notes are as follows:
a) Maker : The person that sign the notes
b) Payee : The person to whom the payment is to be made
c) Date of the note : The date on which the note is made
d) Term of the note : The length of time until the note is due for
payment
e) Face Value : The amount stated on the note
f) Maturity Value : Total sum of money which the payee will receive
on the maturity date
FACE VALUE DATE OF NOTE

TERM OF NOTE, after date I promise to pay to the order

of PAYEE Ringgit Malaysia FACE VALUE for value

received with interest at the rate of Interest per annum until

paid
DATE : MATURITY DATE
MAKER
Example 7.1 - 7.4 (page 154)
Bank Discount
• It is common for lenders, such as bank institutional to deduct the interest
charge in advance for short term loans.
• This charged is called bank discount or interest in advance
• The net amount received by the borrower is called the proceeds
• Bank discount is computed in much the same way as simple interest except
that it is based on the final amount or maturity value.
• It can be computed by the following formula:
D = Sdt
where D = bank discount
S = amount of maturity value
d = discount rate
t = term of discount in years
Example 7.5 - 7.8 (page 157)
Discounting Promissory notes
• A promissory note can be sold to a bank before its maturity date if the
holder is in need of cash.
• Selling the note to the bank is called discounting the note.
• The date of note is discounted is called the discount date
• The amount received on the date of discounting is called the proceeds.
• The proceeds of a promissory note are computed as follows:

PROCEEDS = MATURITY VALUE - BANK DISCOUNT


PROCEEDS = MATURITY VALUE - BANK DISCOUNT

Maturity value :- for non-interest bearing notes it is the face value. If


note is interest bearing,
the maturity value = face value + interest

Bank Discount :- D = Sdt where


S = maturity value of the note
d = bank discount rate
t = the discount period or term of discount
Example 7.11 - 7.13 (page 161)
Simple Interest Rate Equivalent to Bank
Discount Rate
• An interest rate r% and a discount rate d% are said to be equivalent if
the two rate gives the same present value for an amount due in the
future
• Thus, if the amount is S, then the present value of S at r% simple
interest rate is S(1 + rt)-1 and the present value of S, at d% bank
discount rate is S(1 - dt).
• refer textbook page 159
Example 7.9 - 7.10 (page 160)

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