Bank Discount

Bank Discount: In many bank loans, the interest charge computed not on the amount
borrower receives but on the amount that is repaid later. In case of bank discount future
value is called maturity value, present value is called proceed and interest rate is called
discount rate (d).
So, in case of bank discount, Interest (I)= Fdn

We know, F= P+ I
F= P+ Fdn
P= F- Fdn
P= F (1-dn)

d
Effective interest rate, ie =
1 − dn
Note that, effective interest rate (ie) and interest rate (i) are same.

Example: Fran sings a note promising to pay a bank $12000 ten months from now and
receives $10000. Find the discount rate and effective interest rate.
Solution:
Here, F = 12,000
P = 10,000
d =?
n= 10 months = 10/12 = 0.8333

We know, P = F (1- dn)

 10000 = 12000 {1-(d×0.8333)}
 10000
 (1-0.8333d) =
12000
 1-0.8333d = 0.8333

 -0.8333d = 0.8333 - 1

 -0.8333d = -0.1666

 d = 0.1666/0.8333

 d = 0.1999 × 100

 d = 19.99%

Again, d = 19.99% = 19.99/100 = 0.1999

n= 10 months = 10/12 = 0.8333
d
we know, Effective interest rate, ie =
1 − dn

ie = 0.1999/ (1- 0.1999×0.8333)

= 0.1999/ (1- 0.1665)
= 0.1995/ 0.8334
= 0.2393×100
= 23.93%

Home Work:
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