True Discount and Banker’s Discount

The key terms

True Value or Present Value or Present Worth: The money to be paid before the due date to
clear off debt is called present worth of the money.

True Discount: The difference between the amount due and the present value or worth of the
money is called the true discount. In other words, it is the interest on the present worth or value
for the amount of time the debt is due to be discharged.

Banker's Discount: It is the simple interest on the face value or amount due for the period from
the date on which the bill was discounted till the legally due date or for the unexpired time.

The illustration

Following example will clearly demonstrate the difference between True Discount and
Bankers Discount.

The trader A buys goods worth of Rs. 1,00,000 from another trader B at a credit of 1 year. It has
been agreed upon that this amount will have to be returned with 10% interest after a period of 1
year. The amount to be returned is called the Face Value, which is calculated as per Simple
Interest Formula [A=P*(1+R/100*T], where P=1,00,000, R=10%, T=1 for the given case, thus
amounting to Rs. 1,10,000. B prepares a bill of Rs. 1,10,000, which is known as Bill of
Exchange. The date exactly after 1 year is called the Nominal Due Date. Furthermore, 3 days
grace period is also added to this date of expiry to arrive at a date called Legally Due Date.
However, it is to be noted that when the date of the bill is not given, grace days are not to be
added. A signs this bill that allows B to withdraw Rs. 1,10,000 from his bank account as on due
date.
Although this amount is to be redeemed after 1 year by B, but due to some business exigency 8
months henceforth, i.e. 4 months before the due date, B requires the money to be paid
immediately by A and cannot wait till due date. Thus, B approaches the bank to pay him or her
money against the bill of Rs. 1,10,000. In this situation, the money paid by the banker will be
less than the face value of the bill.

The True Value (T.V.) or Present Value (P.V.) or Present Worth (P.W.) is calculated as, P.V. =
F.V. / (1 + R/100*T). Where F.V. (Face Value) = 1,10,000, R (Simple Interest) =10%, T (Time
of redemption before the due date) =1/3 (4 months mean 1/3rd of a year).
So, True Value or Present Value here will be Rs. {1,10,000/(1+0.33/10)}, i.e. Rs. 1,06,485.96.
True Discount (T.D.) = F.V. – P.V. = Rs. (110,000 - 1,06,485.96) = Rs. 3,514.04

But the bank will not pay Rs. 1,06,485.96. Rather it will deduct the Simple Interest (10% for
given case) on the Face Value or Bill Value (Rs. 1,10,000 for given case) for the remaining
period (4 months for given case), to be counted from the date on which the bill was discounted
i.e., the date of payment by the banker (8 months from the issuance of bill for the given case)
and the legally due date (12 months from the issuance of bill for the given case), which is called
the Banker's Discount (B.D.) or Commercial Discount, which is calculated as B.D. = F.V. *
R/100 * T, where F.V.=1,10,000, R=10%, T (Time of redemption before the due date) = 1/3 (4
months mean 1/3rd of a year).
So, Banker’s Discount (B.D.) here will be, Rs.(1,10,000*0.1*.33), i.e. Rs. 3,630

The difference between the Banker's Discount and True Discount is called Banker's Gain
(B.G), which for the give case is equal to Rs. (3,630 - 3,514.04), i.e. Rs. 115.96

The important formulae

Let rate = R% per annum and Time = T years. Then,

1. =

2. ( )= ( )=

3.

4. When the sum is put at compound interest, then

5. B.D. = S.I. on bill for unexpired time = =

6. B.G. = B.D. - T.D. = S.I. on T.D.

7. √

8. F.V. =

9. T.D. =