INVESTMENT MATHEMATICS

MATH 206

General Objective:
The course is intended to provide students with knowledge and appreciation of investment mathematics with an emphasis on
interests in financing and investment activities. This course seeks to enhance the student’s ability to compute depreciation
expense for financial reporting purposes and understand the usefulness of sinking funds and amortization.

Specific Objectives:
At the end of the semester, the students are expected to:
1. Understand fully the importance of interests in business organizations.
2. Identify types of interests applicable to specific problems.
3. Learn the significance of the time value of money in evaluating financing and investment proposals.
4. Learn the relevance of depreciation as applied in business.

LESSON 2
BANK DISCOUNT AND PROMISSORY NOTE

Bank Discount
❖ Another way of lending money is to collect the interest in advance. This interest is referred to as
simple discount more often called bank discount or interest-in-advance.

❖ Like simple interest, discount interest is an amount paid for borrowing money. Unlike simple
interest, however, discount interest is charged at the time the loan has been negotiated is executed.
Whereas simple interest is paid on the maturity date when it is added to the amount of the loan
applied for on the origin date, discount interest is charged in advance and is taken from the amount
of the loan applied for on the origin date.

❖ Simple discount is also called Interest-In-advance notes since interest is subtracted before funds
are given to the borrower. A basic difference between the two types of notes is that simple interest
is calculated based on principal, whereas simple discount is calculated based on maturity value.

❖ A bank discount is an interest computed on the maturity value of the loan and is deducted from
that amount at the loan date to determine the new amount to be received by the borrower called
proceeds – the amount the borrower is to receive.

❖ The interest is computed based on the final amount and is paid at the beginning of a specified
period of time. Thus, this interest is paid in advance.

Formulae: Discount (D) is a deduction from the maturity amount (A) of an obligation allowed for paying it currently.

ID = A ⦁ d ⦁ t P = A (1 – d ⦁ t) or P = A – D
where:
ID = Discount P = Proceeds/Present Value
A = Amount of Maturity A = Maturity Value
d = Discount Rate d = Discount Rate
t = Time t = Time

Illustrative Examples:
1. George borrowed 150,000 Php from the DLSU Credit Cooperative for a term of one year. The interest
charge is a 10% simple discount rate. Find the proceeds of the loan.

2. How much should Emmauel borrow to have 15,000 Php today if he promised to pay it in 2 years with
the rate of discount of 6.25 %?

3. How long should 75,000 Php be discounted to have proceeds of 50,000 Php at a 12.6% simple discount
rate?

4. Determine the discount rate if 32,000 Php is the proceeds of a loan of 43,000 Php due in 16 months.
Promissory Note
❖ A written agreement by the borrower, to settle an amount, to a lender within the designated time
in the future.
❖ A written commitment by a person or business – drawer to pay a certain sum to another person
or business – drawee within a specified time.
❖ It is a written promise signed by the maker or debtor to pay a certain sum of the money on demand
or at a fixed and determinable future date, either to the bearer or to the order of a designated
person.
❖ A promissory note is a negotiable financial paper; it can be sold to a bank or lending agency at a
specified discount rate.

The important features of a promissory note are the following:

1. FV Face Value of the note – the amount borrowed.
2. Dn Date of Note – the date the note was written.
3. Md Maturity Date – the promised date of payment or due date.
4. r Interest Rate – the simple interest rate.
5. tn Term of the note – the difference between the date of the note and its maturity date.
6. td Term of Discount – the difference between the maturity date and the date of discounting.
7. Dd Date of Discounting – the date the note is to be discounted.
8. B Bank Discount – refers to the amount to be deducted from the maturity value at a specified
discount rate and term of discount.
9. P Proceeds – refers to the amount a lender is willing to pay the borrower before the maturity
date of the note.
10. Lender or Payee or Drawee – the person or business lending the money.
11. Maker or Drawer – the borrower, the person or business borrowing the money.

Formulae:

interest: maturity value: face value:

I = FV⦁r⦁tn MV = FV + I FV = MV – I

maturity date: term of discount: bank discount:

Md = Dn + tn Td = Md – Dd B = M⦁dt

proceeds:
P=M-B

Kinds of Promissory Notes

Interest-bearing Note – A note where the interest rate is stipulated that the face value is not
equivalent to the maturity value.

Non-interest-bearing Note – A note where the face value is equivalent to the maturity value but
does not necessarily mean that the original debt did not bear interest.
Types of Notes
Simple Interest Note – This type of note is written on the origin date and redeemable on the
maturity date with a maturity value equivalent to the face value plus interest. The principal
amount of this note is called the face value of the note.

Illustrative Examples:

Maker: Theodore Danie

Payee: Basic Enterprises
Face Value FV: 225,000 Php
Bank Discount Rate r: 8%
Term tn: 75 days
Date of Note Dn: June 13, 1998
Maturity Date Md: August 27, 1998

Bank Discount Note – This note bears an amount called the maturity value. The interest on the
note has been computed and charged in advance. The amount received by the maker of the note,
on the date it was written, is called the proceeds.

Illustrative Examples:

Drawer: Ding Javier

Drawee: Barangay Bank and Trust
Co. Face Value FV: 7,000 Php
Bank Discount Rate r: 14.4%
Term tn: 100 days
Date of Note Dn: September 25, 1993
Maturity Date Md: January 3, 1993

Solve:
1. A 150-day note for 12,500 Php dated June 3, 2002, with interest at 11% is discounted on September 3,
2002, at 8 ½ % simple discount. Find the a). maturity date, b). maturity value, c). term of the discount,
d). discount, e). proceeds.

2. A note for 50,000 Php dated September 8, 2002, is due in 8 months with a simple interest of 13%.
What should the proceeds be they are discounted on April 5, 2003, at a 15% simple discount?

3. Maricris receives 64,000n Php for discounting a 100-day note 30 days before it matures. Find the rate
of the note in simple interest if its value is 58,000 Php and the bank discount is 1,200 Php.