2.2 Bank Discount - Promissory Notes

2.
2 Bank Discount & Promissory Notes CHAPTER 7
2.2 BANK DISCOUNT & PROMISSORY NOTES
LEARNING OBJECTIVES
At the end of this chapter, student should be able to:

1) Explain the meaning of a promissory note.
2) List the main features of a promissory note.
3) Compute the face and maturity values of promissory notes.
4) Compute bank discounts and the proceeds obtained when a promissory note is discounted, and
5) Compute the simple interest rate that a bank earns when a promissory note is discounted.
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2.2 Bank Discount & Promissory Notes CHAPTER 7
2.2.1 Promissory Notes
 Promissory Note or Note in short are debt instrument. Used by anyone who
wants to borrow money from or lend money to another person or party.
 A negotiable instrument is a signed document that promises the bearer a stated

sum of money at a future date or on demand.
 Two types of Promissory note.

1) Interest bearing notes (usually a simple interest rate).
2) Non-Interest bearing notes (Face value)

Main Features of Promissory Notes

Promissory Note
❑ Maker – The person that signs the notes (the borrower). RM 2,500.00 20 April 2012
❑ Payee – The person whom the payment is to be made.

Sixty days after date I promise to pay to
❑ Date of the note – The date on which the note is made.
order of Mohammed Salleh
❑ Term of the note – The length of time for payment made.
Ringgit Malaysia: Two thousand five hundred
❑ Face value – The amount stated on the note. for value received with interest at the rate of 8.00%
❑ Maturity value – The total amount which the payee will per annum until paid.
receive on the maturity date.
No. 1234 Due: 19 June 2012
❑ Maturity date – The date on which maturity value dues.
Mat Hassan

Example 7.1
In the promissory note Promissory Note
a) Who is the maker of the note.
b) Who is the payee of the note. RM 2,500.00 20 April 2012
Calculate the maturity value of the note.
Sixty days after date I promise to pay to

order of Mohammed Salleh
Ringgit Malaysia: Two thousand five hundred
for value received with interest at the rate of 8.00%
per annum until paid.
No. 1234 Due: 19 June 2012

Mat Hassan

Extra Question
E-Question 7 An example of promissory note is shown below. In the promissory note, find
a) Maker
b) Payee
c) Date of the note
d) Term of the note
e) Face value
f) Maturity date
g) Maturity value

Example 7.2
A promissory note dated 22 February 2012 reads ‘three months from date, I promise to pay RM1,000.00
with interest at 9% per annum’. Find
a) The maturity date of the note.
b) The maturity value of the note.

Quick Check 7A
(Ans:15 Oct 2015, RM5,066.67)
QUESTION 1
A promissory note dated 15 August 2015 reads ‘two months after date, I promise to pay RM5,000.00 with interest
at 8% per annum’.
a) Find the maturity date of the note.
b) Find the maturity value of the note.

Example 7.3
The maturity value of a 60-day interest bearing promissory note is RM450. If the interest rate is 6% per
annum, what is the face value of the note?

Quick Check 7A
(Ans: RM2,000)
QUESTION 2
The maturity value of a 60-day interest bearing promissory note is RM2,020. If the interest rate is 6% per annum,
what is the face value of the note?

Example 7.4
The interest on a 90-day promissory note is RM46. If the interest rate is 7% per annum, find the face value
of the note.
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Quick Check 7A
(Ans: RM10,000)
QUESTION 3
The interest on a 90-day promissory note is RM200. If the interest rate is 8% per annum, find the face value of the note.

Extra Question
(Ans: 15/10/2002, RM2,550)
E-Question 8
A 120-day promissory note for RM2,500 is dated 17 June 2002. If the rate is 6% ordinary simple interest, find
a) The due date.
b) The maturity value

Extra Question
(Ans: 92 days, RM1,428.62)
E-Question 9
A promissory note for RM1,400 is dated 15 July 2002 and has a due date of 15 October 2002. If the rate is 8% per
annum. Find
a) The term of the note.
b) The maturity value

Extra Question
(Ans: RM3,448.28)
E-Question 10
The maturity value of a 90 day interest bearing promissory note is RM3,500. If the interest rate is 6% per annum,
find the face value of the note.

2.2.2 Bank Discount
 Bank Discount or interest in advance is interest deducted in advanced.

 For example,
• Ali wants to borrow RM1,000 for a year at a discount rate of 12%.
• The lender will take RM1,0000.12  1 = RM120 in advance.
• Thus Ali will received RM1,000−RM120 = RM 880 as proceeds.
• It must be noted that at the end of one year Ali will have to pay back the lender of RM1,000.
 Now, if Ali wants to borrow RM1,000 for a year at 12% simple interest, find the amount that
Ali has to pay back at the end of one year.

Bank Discount Formula

(computed in the same way as simple interest except that it is based on the maturity value)
The Proceed is computed as follows:

𝑫 = 𝑺𝒅𝒕
𝑃𝑟 = 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 − 𝐵𝑎𝑛𝑘 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡

= 𝑆−𝐷
where, = 𝑆 − (𝑆𝑑𝑡)
𝑫 = Bank Discount = 𝑆(1 − 𝑑𝑡)
𝑺 = Amount of maturity value
𝒅 = Discount rate
𝒕 = Term in years
∴ 𝑷𝒓 = 𝑺 𝟏 − 𝒅𝒕

Example 7.6
Sharifah borrows RM8,000 for three months from a lender who charge a discount rate of 10%. Find
a) the discount.
b) the proceeds.

Quick Check 7A
(Ans: RM225, RM4,775)
QUESTION 4
Juliana borrows RM5,000 for six months from a lender who charges a discount rate of 9%. Find
a) the discount.
b) the proceeds.

Example 7.7
1
If Tong needs RM4,000 now, how much should he borrow from his bank for 1 years at a 12% bank
discount rate. 2

Quick Check 7A
(Ans: RM11,627.91)
QUESTION 5
Sarina needs RM10,000 now to start a business. How much should she borrow from her bank for two years at 7%
bank discount?

Extra Question
(Ans: RM450, RM4,550)
E-Question 11
Fariza borrows RM5,000 for 9 months from a lender who charges a discount rate of 12%. Find
a) the discount.
b) the proceeds.

Extra Question
(Ans: RM1,800, RM78,200)
E-Question 12
Compute the discount amount and the proceeds for a 90-day loan of RM80,000 that has a bank discount rate of 9%.

PRESENT VALUE
Simple Interest Bank Discount
𝑆 = 𝑃 1 + 𝑟𝑡 𝑃𝑟 = 𝑆 1 − 𝑑𝑡

Which one banker prefer more?
Which one borrower prefer more?
Which is the profit?
Which is the loss?
Simple Interest or Bank Discount??

Example 7.9
Find the present value of RM500 due in two years at Find
a) a simple interest rate of 8%. a) Simple interest
b) a simple discount rate of 8%. b) Bank Discount

Quick Check 7A
(Ans: RM2,142.86, RM2,112)
(RM257.14, RM288)
QUESTION 6
Find the present value of RM2,400 due in three years at Find
a) a simple interest rate of 4% p.a. a) Simple interest
b) a simple discount rate of 4% p.a. b) Bank Discount

2.2.3 Simple Interest Rate Equivalent to Bank Discount Rate
 An interest rate 𝑟% and a discount rate 𝑑% are said to be equivalent if the two
rates give the same present value for an amount due in the future.
Interest Rate Formula Discount Rate Formula
𝒅 𝒓
𝒓= 𝒅=
𝟏−𝒅𝒕 𝟏+𝒓𝒕
where, where,
𝒓 = Interest rate 𝒅 = Bank discount
𝒅 = Bank discount 𝒓 = Interest rate
𝒕 = Term in years 𝒕 = Term in years

Example 7.10
A bank discounts a RM4,000 note due in six months using a bank discount rate of 12%. Find the
equivalent simple interest rate that is charge by the bank.

Quick Check 7B
(Ans: 5.06%)
QUESTION 1
A bank discounts a RM10,000 note due in three months, using a bank discount rate of 5%. Find the equivalent
simple interest rate charged by the bank.

Example 7.11
What discount rate should a lender charge to earn an interest rate of 20% on a nine-month loan.

Quick Check 7B (Ans: 6.76%)
QUESTION 2 What discount rate should a lender charge to earn an interest rate of 7% on a six-month loan.

2.2.4 Discounting Promissory Notes
 A promissory note can be sold to a bank before its maturity date if the holder
is in need of cash.
 Selling the note to the bank is called discounting the note.

 The date the note is discounted is called the discount date.
 The amount received after the note is discounted is called proceeds.

Example 7.12
Marina, a businesswoman, receives a promissory note for RM1,500 with interest at 10% per annum that is
due in 60 days. The note is dated 10 April 2015. The note is discounted on 15 April 2015 at a bank that
charges 12% discount. Determine
a) the maturity date.
b) the maturity value.
c) the discount period.
d) the proceeds.

Example 7.13
On 24 July 2015, Vani discounts the non-interest bearing note as shown below at bank that charge a
discount rate of 11%. Find the proceeds.
RM 2,600 20 June 2015
Six months after date I promise to pay to

the order of Vani d/o Kumar .
Ringgit Malaysia: Two thousand six hundred
only .
for value received.
No. 1235 Due: 20 December 2015
Ramli Hasan

Quick Check 7B
(Ans: 20 days)
QUESTION 3
A RM5,000, 8%, 6-month note dated 10 April 2015 is discounted at 6.5%. If the discount amount is RM18.78,
find the term of discount of the note.

Quick Check 7B
(Ans: 10/8/2015, RM8,180, RM8,144.55)
QUESTION 4
Melissa, a businesswoman, receives a promissory note for RM8,000 with interest at 9% per. The note is dated 12
May 2015 is due in 90 days. The note is discounted on 15 July 2015 at a bank that charges 6% discount. Find
c) the proceeds.

Quick Check 7B
(Ans: 4/4/2015, RM20,333.33, RM195.09, 5.76%)
QUESTION 6
Nally received a 120-day promissory note for RM20,000 which matures on 2nd August 2015 with a simple rate of
5% per annum. She later discounted the note 60 days before the maturity date and obtained RM20,138.24. Find
a) the date of the note.
c) the bank discount.
d) the bank discount rate.

Extra Question
(Ans: RM6,250, 22/11/02, 117 days, RM5,945.31)
E-Question 13
On 28 July 2002, Billy needed cash and sold a 150-day promissory note at a 15% discount rate. The note had a
face value of RM6,000, was dated 25 June 2002, and carried an interest rate 10%. Find
a) the maturity value.
b) the maturity date.
c) the term of discount.
d) the proceeds.

Extra Question
(Ans: 18/9/2000, 39 days, RM2068.15)
E-Question 14
Shahnaz held a 60-day, RM2,100 non-interest bearing note dated 20 July 2000. On 10 August 2000, she took the
note to a finance company, which discounted it at 14%. Find
b) the term of discount.
c) the proceeds.


2.2 Bank Discount - Promissory Notes

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2.

2 Bank Discount & Promissory Notes CHAPTER 7

2.2 BANK DISCOUNT & PROMISSORY NOTES

At the end of this chapter, student should be able to:

Faculty of Computer & Mathematical Sciences Page|1

2.2.1 Promissory Notes

 A negotiable instrument is a signed document that promises the bearer a stated

 Two types of Promissory note.

Faculty of Computer & Mathematical Sciences Page|2

Main Features of Promissory Notes

❑ Payee – The person whom the payment is to be made.

Faculty of Computer & Mathematical Sciences Page|3

Sixty days after date I promise to pay to

No. 1234 Due: 19 June 2012

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c) Date of the note

d) Term of the note

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2.2.2 Bank Discount

 Bank Discount or interest in advance is interest deducted in advanced.

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Bank Discount Formula

The Proceed is computed as follows:

𝑃𝑟 = 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 − 𝐵𝑎𝑛𝑘 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡

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Simple Interest Bank Discount

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Which one banker prefer more?

Which one borrower prefer more?

Which is the profit?

Which is the loss?

Simple Interest or Bank Discount??

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2.2.3 Simple Interest Rate Equivalent to Bank Discount Rate

Interest Rate Formula Discount Rate Formula

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Quick Check 7B (Ans: 6.76%)

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2.2.4 Discounting Promissory Notes

 Selling the note to the bank is called discounting the note.

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RM 2,600 20 June 2015