Upload
vanthuy
View
222
Download
1
Embed Size (px)
Citation preview
Chapter 11
Promissory Notes, Simple Discount Notes, and the Discount Process
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
11-2
1. Differentiate between interest-bearing and noninterest-
bearing notes
2. Calculate bank discount and proceeds for simple
discount notes
3. Calculate and compare the interest, maturity value,
proceeds, and effective rate of a simple interest note
with a simple discount note
4. Explain and calculate the effective rate for a Treasury bill
Promissory Notes, Simple Discount Notes, and the Discount Process #11 Learning Unit Objectives Structure of Promissory Notes; the
Simple Discount Note LU11.1
11-3
1. Calculate the maturity value, bank
discount, and proceeds of discounting
an interest-bearing note before maturity
2. Identify and complete the four steps of
the discounting process
Promissory Notes, Simple Discount Notes, and the Discount Process #11 Learning Unit Objectives Discounting and Interest-Bearing Note
before Maturity LU11.2
11-4
Structure of a Promissory Note Figure 11.1
___________a. LAWTON, OKLAHOMA __________________c.
__________________________b. AFTER DATE _______ PROMISE TO PAY TO
THE ORDER OF ___________________________________________d.
____________________________________________DOLLARS
PAYABLE AT ____________________________________
VALUE RECEIVED WITH INTEREST AT ______e. REGAL CORPORATION f.
NO. ______ DUE _____________________g. ________________
TREASURER
a. Face value d. Payee g. Maturity date
b. Time e. Rate
c. Date f. Maker
$10,000 October 2, 2010
Sixty days We
G.J. Equipment Company
Ten Thousand and 00/100 -------
Able National Bank
9%
114 December 1, 2010 J.M. Moore
11-5
Simple Discount Note
Simple discount note - A note in
which the loan interest is
deducted in advance
Bank discount - the interest that
banks deduct in advance
Bank discount rate - the
percent of interest
Proceeds - the amount the
borrower receives after the bank
deducts its discount from the
loans maturity value
Maturity Value – The total
amount due at the end of the loan
11-6
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
$10,000 - $250 = $9,750 Proceeds
Bank Discount
Bank Discount
Rate
11-7
Table 11.1 - Comparison of simple interest
note and simple discount note
Simple interest note (Chapter 10)
1. A promissory note for a loan with a term of usually
less than 1 year. Example: 60 days
2. Paid back by one payment at maturity. Face value
equals actual amount (or principal) of loan (this is not
maturity value)
3. Interest computed on face value or what is actually
borrowed. Example: $186.67
4. Maturity value = Face value + Interest Example: $14, 186.67
5. Borrower receives the face value Example: $14,000
6. Effective rate (true rate is same as rate stated on
note). Example: 8%
7. Used frequently instead of the simple discount note.
Example: 8%
Simple discount note (Chapter 11)
1. A promissory note for a loan with a term of usually
less than 1 year. Example: 60 days
2. Paid back by one payment at maturity. Face value
equals maturity value (what will be repaid)
3. Interest computed on maturity value or what will be
repaid and not on actual amount borrowed. Example:
$186.67
4. Maturity value = Face value Example: $14, 000
5. Borrower receives proceeds = Face value - bank
discount. Example: $13,813.33
6. Effective rate is higher since interest was deducted
in advance. Example: 8.11%
7. Not used as much now because in 1969
congressional legislation required that the true rate of
interest be revealed. Still used where legislation does
not apply, such as personal loans.
11-8
Comparison
Interest
I = Face Value (Principal) x R x T
I = $14,000 x .08 x 60 360 I = $187.67
Maturity Value
MV = Face Value + Interest
MV = $14,000 + $ 187.67=$14,187.67
Proceeds
Proceeds = Face Value
Proceeds = $14,000
Simple Interest Note - Ch. 10 Simple Discount Note - Ch. 11
Interest
I = Face Value (Principal) x R x T
I = $14,000 x .08 x 60 360 I = $186.67
Maturity Value
MV = $14,000
Proceeds
Proceeds = MV - Bank discount
Proceeds = $14,000 - $186.67
Proceeds = $13,813.33
11-9
Comparison - Effective Rate
Rate = Interest Proceeds x Time
Rate = $186.67
$14,000 x 60 360 Rate = 8%
Simple Interest Note - Ch. 10 Simple Discount Note - Ch. 11
Rate = Interest Proceeds x Time
Rate = $186.67
$13,813.33 x 60 360 Rate = 8.11%
The effective rate for a simple discount note is
higher than the stated rate, since the bank
calculated the rate on the face of the note and not
on what Terrance received
11-10
Treasury Bills
Loan to Federal Govt.
Terms of Purchase
91 days (13 Weeks)
or
1 Year
If you buy a $10,000
13 week Treasury
bill at 8%, how
much will you pay
and what is the
effective rate?
$10,000 x .08 x 13 = $200 52
Cost = $10,000 - $200 = $9,800
Effective Rate = $200 = 8.16% $9,800 x 13 52
11-11
Discounting an Interest-Bearing
Note before Maturity
Step 1. Calculate the interest and maturity value
Step 2. Calculate the discount period
(time the bank holds note)
Step 3. Calculate the bank discount
Step 4. Calculate the
proceeds
11-12
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 8 $2,000 185 days 10% 9% August 9
Date of Date of Date
note discount note due
March 8 August 9 Sept. 9
154 days before note is discounted
31 days
Bank waits
185 days total length of note
11-13
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 8 $2,000 185 days 10% 9% August 9
What are Camille’s interest and maturity value? What are the
discount period and bank discount? What are the proceeds?
I = $2,000 x .10 x 185 = $102.78 360
MV = $2,000 + $102.780 = $2,102.78
$2,102.78 x .09 x 31 = 16.30 360 $2102.78 – 16.30 = $2,068.48
Calculation
on next slide
11-14
Calculation of days without table
Manual Calculation
March 31
-8
23
April 30
May 31
June 30
July 31
August 9
154
185 days - length of note
-154 days Roger held note
116 days bank waits
Table Calculation
August 9 221 days
March 8 -67 days
154 days passed before note is discounted
185 day note
-154
31 discount pd.
11-15
Problem 11-10:
Solution:
a. ($10,000.00 - $9,881.25) = $118.75
$118.75 _
$9,881.25 x 13 52
$118.75 _
$2,470.3125
= 4.8070841% or 4.81% effective rate
b. =
11-16
Problem 11-13:
Solution:
$10,000 x .05 x = $125
13
52
Effective rate = = 5.06%
$125 _
$9,875 x
13 52
11-17
Problem 11-14:
Solution: Aug. 16 228 days May 8 -128 100 days passed 180 – 100 = 80 days (discount period)
$3,000 x .08 x = $120
$3,000 + $120 = $3,120 MV
180 360
Bank Discount
$3,120.00 x .09 x = $62.40
$3,120.00
- 62.40
$3,057.60 proceeds
80 360
11-18
Problem 11-16:
Solution:
June 12 163 days
May 12 - 132
31 days passed
90 – 31 = 59 days
(discount period)
Maturity Value = $8,000 x .08 x
90
360 = $240 + $8,000 = $8,240
Bank Discount = $8,240 x .10 x
59
360
Discount Period = 90 - 31 = 59 days
= $135.04
Proceeds = $8,240 - $135.04 = $8,104.96