1. Promissory Notes, Simple Discount Notes, and The Discount Process
Chapter Eleven
Promissory Notes, Simple Discount Notes, and The Discount Process
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning unit objectives
LU 11-1: Structure of Promissory Notes; the Simple Discount Note
Differentiate between interest-bearing and non-interest-bearing notes.
Calculate bank discount and proceeds for simple discount notes.
Calculate and compare the interest, maturity value, proceeds, and effective rate of a simple interest note with a simple discount note.
Explain and calculate the effective rate for a Treasury bill.
LU 11-2: Discounting an Interest-Bearing Note before Maturity
Calculate the maturity value, bank discount, and proceeds of discounting an interest-bearing note before maturity.
Identify and complete the four steps of the discounting process.

3. Structure of a Promissory Note

4. Simple Discount Note Terminology
Simple Discount Note - A note in which the loan interest is deducted in advance.
Bank Discount - The interest that banks deduct in advance.
Maturity Value – The total amount due at the end of the loan.
Proceeds - The amount the borrower receives after the bank deducts its discount from the loan’s maturity value.
Bank Discount Rate - The percent of interest.

5. Simple Discount Note Example:
Terrance Rime borrowed $10,000 for 90 days from Webster Bank. The bank discounted the note at 10%. What proceeds does Terrance receive?
$10,000 x .10 x 90 = $250
360
Bank Discount
Bank Discount
Rate
$10, $250 = $9,750
Proceeds

6. Comparison of simple interest note and simple discount note

7. Comparison of simple interest note and simple discount note
Scenario
Face value = $18,000
Interest rate = 8%
60 days

8. Treasury Bills Effective rate = $200 = 8.16% $9,800 x 13 52
A Treasury bill is a loan to the federal government.
Terms of Purchase: 91 days (13 weeks), or 1 year
Example: If you buy a $10,000, 13-week Treasury bill at 8%, how much will you pay, and what is the effective rate? 13 52
$10,000 x .08 x
= $200
Cost = $10, $200 = $9,800
Effective rate = $ = 8.16%
$9,800 x 13 52

9. Discounting an Interest-Bearing Note before Maturity
Step 4. Calculate the proceeds.
Step 3. Calculate the bank discount.
Step 2. Calculate the discount period (time the bank holds note).
Step 1. Calculate the interest and maturity value.

10. Discounting an Interest-Bearing Note before Maturity
Roger Company sold the following promissory note to the bank:
Date of Face Value Length of Interest Bank Discount Date of
Note of Note Note Rate Rate Discount
March $2, days % % August 9
11-10

11. Discounting an Interest-Bearing Note before Maturity
Roger Company sold the following promissory note to the bank:
Date of Face Value Length of Interest Bank Discount Date of
Note of Note Note Rate Rate Discount
March $2, days % % August 9
I = $2,000 x .06 x = $61.67
360
What are Roger’s interest and maturity value?
MV = $2,000 + $61.67 = $2,061.67
What are the discount period and bank discount?
$2, x .05 x 31 = $8.80
360
What are the proceeds?
Calculation on next slide
$2, – $8.80 = $2,052.87

12. Calculation of days without table
Manual Calculation
March 31
-- 8 23
April 30
May 31
June 30
July 31
August 9
154
Table Calculation
August days
March days
Days passed before
note is discounted 154
Length of note 185
-- 154
Discount period
185 days -- length of note
days Roger held note
31 days bank waits