Ch 9 Simple Interest

Simple Discount Notes

Notes

Notes are short term loans. Simple Interest Notes

Section 1

Simple Discount Notes This section…

$2000

Simple Interest Notes One year simple interest note @ 6.25% for

$2000. Borrower receives the face value = $2000

Interest is computed to be $125.

Borrower must pay back $2125 on the maturity date of the loan.

$2,000 $$2,125

Simple Discount Notes One year simple discount note @ 6.25% for

$2000.

Borrower walks out with: $1,875

Interest is computed and immediately deducted (discounted) from the face value: $125

Borrower must pay back $2,000 on the maturity date of the loan.$1,875 $

$2,000

Comparison

Simple Interest Note

Simple Discount Note

Face Value

Cost

Amount Borrowed

Maturity Value

1-year loan of $2,000 loan at 6.25%.

$2,000 $2,000

Interest: $125

I = PRT

Bank Discount: $125

B = MDT$2,000

Principle

$1,875

Proceeds

$2,125 $2,000

Using the Terminology 1 of 2

Simple discount note of $4300. Bank Discount is $285

Face Value = __________

Proceeds = __________

Bank Discount = __________

Maturity Value = __________

$4,300

$4,300 - $285$4,015

$285

$4,300

Using the Terminology 2 of 2

Simple discount note of $12,500. Bank discount is $750

Face Value = __________

Proceeds = __________

Bank Discount = __________

Maturity Value = __________

$12,500

$12,500 - $750$11,750

$750

$12,500

Ch 9 Simple Discount Notes

Determine the bank discount and the proceeds.

Bank Discount Sample Problem 1

Bank Discount = Maturity Value x Discount Rate x Time

B = MDT

Maturity Value

Discount Rate

Time (years)

B = $2000 x .06 x

B = $30

$30

90360

Proceeds Sample Problem 1 Continued

Proceeds = Maturity Value - Bank Discount

P = M - B

P = $2000 - $30

P = $1970_____ proceeds$1970

Bank Discount Practice Problem

Determine the bank discount:

Simple Discount Note

$800

4.5% discount rate

120 days

$______ discount

B = MDT

B = $800 x .045 x

B = $12

12

$______ proceeds

120 360

Sample Practice Problem

Determine the proceeds:

Simple Discount Note

$800

4.5% discount rate

120 days

$12 discount

$_____ proceeds

P = M - B

P = $800 - $12

P = $788 788

Compute Discount and Proceeds 1 of 1 Simple discount note with a face value of $14,250.

It is an 8 month note at 8%. Discount = _______ Proceeds = _______ B = MDT

P = M - B

B = 14,250 x 0.08 x = $760

P = 14,250 – 760 = $13,490

812

Practice

Ch 9, Section 3 – Simple Discount Notes

Textbook Exercise 9.3 (pages 371 – 374)

_____ #3 – 6, 8 – 12, 14

Ch 9 Simple Discount Notes

Computing the face value

Finding Face Value

A person needs to borrow $5800 to pay for home improvements.

Would a simple discount note with a face value of $5800 meet their needs?

Simple Discount Note

$5800

5.75% discount rate180 days

$166.75 discount

$5633.25 proceeds

1 – DT1 – DT

Deriving the Formula for MB =

P = M – P = M – MDTB

MDT

P = M(1 – DT)

1 – DTP = M

Computing Face Value to Achieve Desired Proceeds

DT

PM

1

Proceeds received by the borrower.

Discount rate used by the bank (%)Time of the loan (years)

Simple Discount Note

$5800

5.75% discount rate180 days

$________ discount

$________ proceeds

360180

0575.1

5800M

69.971,5$M

$5,971.69

171.69

5800

02875.01

5800

M

97125.0

5800M

Computing Face Value 1 of 2

#20, page 372 Lane Engineering needs $120,000 to install

computers and network. The simple discount note has a 9.5% rate and matures in 80 days.

Find the face value of the loan.

DT

PM

1

36080

095.01

000,120

M

021111.01

000,120

9788888.0

000,120 97.587,122$

Computing Face Value 2 of 2

#26 part (a), page 373 A Malaysian electric company requires

proceeds of $720,000 and borrows from a bank in Thailand at 12% discount for 45 days.

Find the face value of the loan.

DT

PM

1

36045

12.01

000,720

M

015.01

000,720

985.0

000,720 47.964,730$

Practice

Ch 9, Section 3 – Simple Discount Notes

Textbook Exercise 9.3 (pages 371 – 374)

_____ #20, 25, 26