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LESSON 5LESSON 5
SIMPLE DISCOUNT NOTE
Learning OutcomesLearning Outcomes• By the end of this lesson, students
should be able to:–Define the basic terms used with simple
discount note.–Differentiate between simple interest and
simple discount note.–Calculate the bank discount and proceeds.–Find the face value.–Understand the concept of discounting a
note.• Find the proceeds when discounting a
simple interest note
List of TopicsList of Topics◦Simple discount note.◦Differences between simple interest
and simple discount note.◦Calculate the bank discount and
proceeds.◦Find the face value.◦Understand the concept of
discounting a note.Find the proceeds when
discounting a simple interest note
Simple discount noteSimple discount note• The total amount due at the end of the
loan, or the maturity value is the sum of the face value (principal) and interest. Some banks deduct the loan interest in advance from the face value. The borrower will not receive the face value on these types of notes, but will only receive face value less interest, which is called the proceeds. When banks do this, the note is called a simple discount note. The interest charged is called bank discount.
Contd…Contd…• Formula to calculate bank
discount: B =MDT
Where, B – Bank discount (interest taken in
advance) M – Maturity value (Face value of the
simple discount note / Amount to be repaid at the end of a loan period)
D – Discount rate (interest rate for interest taken in advance)
T – Time in the loan period (in years)
Contd…Contd…Formula to calculate the
proceeds. P =M-B Where, P - Proceeds (Amount received
by the borrower for each note) M – Maturity value (Face Value
of the simple discount note) B – Bank discount
Contd….Contd….• Formula to calculate Maturity value and
interest of the simple interest note.• Simple interest is found by using the
formula• M = P +I and I =PRT
Where: M – Maturity value I – Interest, the amount charged or
earned for any loan or deposits. P – Principal, either the loan amount
or the amount invested. R – Interest rate T – Time of the loan period (in years)
Example Example If two notes exist: One is a 60-
day note for RM20,000 discounted at 9%, and the other is a 60-day note for RM20,000 with a 9% simple interest rate. Find the following:
Interest owed.Proceeds.Maturity value.
Simple discount note Simple Interest Note1. Interest 1. Interest
1. Proceeds 1. Proceeds
1. Maturity Value 1. Maturity value
60 20,000 9%
360 300
Simple discount note
B MDT
RM
RM
60 20,000 9%
360 300
Simple Interest Note
I PRT
RM
RM
20,000 300
19,700
P M B
RM
RM
Pr
20,000
incipal Face Value
RM
20,000
Maturity value Face Value
RM
20,000 300
20,300
M P I
RM
RM
Discounting a Simple Interest Note before MaturityDiscounting a Simple Interest Note before Maturity
• The process of discounting a simple interest note before maturity involves a three-party arrangement, such as manufacturer, retailer and bank.
• For example, a manufacturer delivered furniture to a retailer in March, 2011. The manufacturer did not request cash payment from the retailer immediately. The payment for the furniture is due in September.
• In return, the manufacturer accept simple interest note to affirm the debt. However, the manufacturer will have its money tied up in this furniture until September.
• If the manufacturer needs cash sooner than September, the manufacturer will have to sell the note to a bank before it matures. The manufacturer is discounting the note before it matures
• The bank will buy the note at a discounted price by charging some fee called bank discount.
• The bank gives the maturity value of the notes minus a fee charged by the bank for the service.
• The actual amount received by the manufacturer is called proceeds. The bank will received the full maturity value from the retailer when it is due in September
Steps for discounting simple Steps for discounting simple interest noteinterest noteThe steps involved for
discounting a simple interest note are as follows:
Find the maturity value of the original note.
Find the discount period.Find the discount.Find the proceeds.
ExampleExample• Anis Holdings received a RM 10,200,
7.5%, 200-day promissory note dated June 15 from a retailer. The note was discounted on October 22 at a national bank. The bank discount rate was 11%. Calculate:
• The maturity value of the simple interest note.
• The discount period.• The bank discount.• The proceeds.
Maturity valueMaturity value
425 RM 360
2000.07510,200 RM
PRTI
10,625 RM
425 RM10,200 RM
IPM
The discount periodThe discount period• To calculate discount period, first, we
need to know the maturity date of the note. The maturity date of the note is found as:
• Day 166 (June 15) + 165 days = 331 (27 November)
• Discount period is the time from the day the note is sold (October 22) to the maturity date of the loan (27 November).
• November 27 331• October 22 -295• =36 days• The discount period is 36 days
The bank discountThe bank discountThe discount is computed by
using the discount period of 36 days and the 11% discount rate.
116.88 RM360
3611.010,625 RM
MDTB
The proceedsThe proceedsProceeds are the amount of
money received by Anis Holdings from the bank.
P =M –BRM 10,625 –RM 116.88 =
RM10,508.13
Lesson SummaryLesson Summary• This topic explains the discount note
and its calculation. Students would be able to compute a discount note and the proceeds if discount notes cases are presented its maturity.
• The next topic would cover the lesson on compound interest. The interest charged is compounded over the length of the loan period, thereby making it grow bigger than simple interest.