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After reading the material in this chapter, you should be able to: Differentctiiate 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 effeve rate of a simple interest note with a simple discount note; explain and calculate the effective rate for a Treasury bill;...
Chapter Eleven Promissory Notes, Simple Discount Notes, and The Discount Process McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 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 112 Structure of a Promissory Note 113 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 114 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 $10,000 - $250 = $9,750 Proceeds 115 Comparison of simple interest note and simple discount note 116 Comparison of simple interest note and simple discount note Scenario Face value = $18,000 Interest rate = 8% 60 days 117 Treasury Bills A Treasury bill is a loan to the federal government Terms of Purchase: 91 days (13 weeks), or 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? $10,000 x 08 x 13 = $200 52 Cost = $10,000 $200 = $9,800 Effective rate = 8.16% $200 $9,800 x 52 = 13 118 Discounting an Interest-Bearing Note before Maturity Step Calculate the proceeds Step Calculate the bank discount Step Calculate the discount period (time the bank holds note) Step Calculate the interest and maturity value 119 Discounting an Interest-Bearing Note before Maturity Roger Company sold the following promissory note to the bank: Date of Note March Face Value Length of Interest Bank Discount Date of of Note Note Rate Rate Discount $2,000 185 days 6% 5% August 11-10 1110 Discounting an Interest-Bearing Note before Maturity Roger Company sold the following promissory note to the bank: Date of Note March Face Value Length of Interest Bank Discount Date of of Note Note Rate Rate Discount $2,000 185 days 6% 5% August I = $2,000 What are Roger’s interest and maturity value? x 06 x 360 185 = $61.67 MV = $2,000 + $61.67 = $2,061.67 What are the discount period and bank discount? $2,061.67 x 05 x 360 31 = What are the proceeds? $2,061.67 – $8.80 = $2,052.87 $8.80 Calculation on next slide 1111 Calculation of days without table Manual Calculation Table Calculation March 31 23 April 30 May 31 June 30 July 31 August 154 August March Days passed before note is discounted Length of note Discount period 221 days 67 days 154 185 154 31 185 days length of note 154 days Roger held note 31 days bank waits 1112 ... objectives LU 1 1-1 : 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. .. Identify and complete the four steps of the discounting process 112 Structure of a Promissory Note 113 Simple Discount Note Terminology Simple Discount Note - A note in which the loan interest... 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