PROMISSORY NOTES Non-Interest-bearing notes:

Type of Promissory Notes Maturity value, S = Face value

Promissory notes can be of two types: =P

 Interest Bearing Note EXAMPLE:

 The rate of interest is stated on the note and is usually simple
Peter has notes and have a face value of Php 5000 for 60 days. The note has
interest rate.
a simple interest rate of 8% What is the maturity value for the note?
 Non-Interest-Bearing Note
 The rate of interest is not stated on the note. SOLUTION:
The main features of a note usually include the:

• Face Value/Principal amount: the amount stated on the note

• Interest rate if any

• The date: the date on which the note is made EXERCISES:

• Terms or repayment: the length of time until the note is due for payment • A promissory note dated 23 October 2015 reads Seven months from date,
I promise to pay Php 4000 with interest at 6% per annum’. Find
• Maturity date: the date on which the maturity value is due
(i) the maturity date
• Payee: the person to whom the payment is to be made
(ii) the maturity value
• Maker: the person that signs the note

MATURITY VALUE

What is maturity value?

• The total sum of money which the payee will receive on the maturity date

Formula Maturity Value:

• The maturity value for 90 days promissory note is Php 450 that bears
Interest bearing notes:
interest at 8% per annum. What is the face value for this interest-bearing
Maturity value, S = Face value + Interest note?

=P+I

= P + Prt

= P(1+rt)
BANK DISCOUNT & DISCOUNTING NOTES EXAMPLE:

What is bank discount? On 2 April 2016, Karding borrowed an amount of Php 8000 at 2% interest
rate for three months. The discount rate charged by the lender is 10%. Find
• The interest charge from a bank for a short-term loan.
the bank discount if the note was discounted on 2 May 2012.
• Bank discount computed based on the maturity value (final amount)
SOLUTION:
What is discounting notes?

• Selling the notesto the bank before its maturity date

Why discounting notes?

• The holder needs a cash before its maturity date

FORMULA BANK DISCOUNT

D = Sdt
EXERCISES:
where
• If Tong will receive 4000, 30 days before its maturity date, calculate the
S: the simple amount/maturity value amount of maturity value at 12% bank discount?

d: discount rate (%)

t: term of discount in years

PROCEED

If the note was discounted:

• the date of the note is discounting date

• the amount received on the date of discounting is called the proceeds. SIMPLE INTEREST EQUIVALENT TO BANK DISCOUNT

• The terms of discountstarting from the note was discounted until the An interest rate, r% and discount rate d% are said to be equivalent if the
maturity date. two rates give the same present value for an amount due in the future.
Thus,
Proceeds = Maturity Value – Bank Discount
Calculate d% given that r%
=S–D

= S – Sdt
Calculate r% given that d%
= S(1-dt)
EXAMPLE: On march 30, Insyong accepted a nine month $32,250.00 promissory

A note of 4000 will due in six months. A bank discount rate of 12% is applied Note at 7% interest from one of his clients to pay for some carpentry work
to this note. Find the equivalent simple interest rate that is charged by the he had completed. On April 27, he sold the notes to Hammond bank at 9.5%
bank. discount. What were his proceed?

Exercise: What discount rate should a lender charge to earn an interest rate
of 20% on a 9 months loan?

Agnes Abanilla was granted a loan of P20,000 by her employer CPM

Industrial Fabricator and Construction Corporation with an interest of 6% for
180 days on the principal collected in advance. The corporation would
accept a promissory note for P20,000 non-interest for 180 days. If
discounted at once, find the proceeds of the note.