Discounting a Note Before Maturity

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Presentation transcript:

Discounting a Note Before Maturity Section 9.4 Discounting a Note Before Maturity

Discount a note… When a simple interest loan (promissory note) is sold to a bank before it reaches maturity.

Find the proceeds when discounting simple interest notes 1. Start with the Simple Interest Note: Find the due date (# of days) of the original note. Find the Maturity Value (use M = P + I and I = P R T)

2. Next, discount the simple interest note: Find the discount period (The # of days from the sale of the note to the original due date) Find the Discount of the note. (B = M x D x T) Find the Proceeds (P = M – B)

A simple interest note has a face value of $14,000; a rate of 9%, and a time to maturity of 240 days. It is discounted after 80 days at a rate of 11%. Find the maturity value of the simple interest note and the proceeds at the time of the discount.

On March 27, Dayton Finance loans Jorge Rivera $9200 for 150 days at 11% simple interest. The finance company sells the note to a private investor on April 24. Find the maturity value of the simple interest note and the proceeds to Dayton Finance if the note sold at a discount rate of 12%