BANK DISCOUNT &

PROMISSORY NOTES
PREPARED BY : NUR ANIS FATIHAH BINTI RAZALLI
OUTLINE
• Promissory notes
• Bank Discount
• Discounting Promissory notes
• Simple Interest Rate Equivalent to Bank Discount Rate
Promissory Notes
• Promissory notes or notes in short are debt instruments.
• It can be used by anyone who want to borrow or to lend money.
• It is also an important negotiable instruments used in the economy.
• A promissory note is a written promise made by one person or party
to repay a loan or debt on a specified future date to another person
or party
• There are two types of promissory notes :
- interest bearing notes
- non-interest bearing notes
• For interest bearing note, the rate of interest is stated on the note
and is usually a simple interest rate.
• The main features of a promissory notes are as follows:
a) Maker : The person that sign the notes
b) Payee : The person to whom the payment is to be made
c) Date of the note : The date on which the note is made
d) Term of the note : The length of time until the note is due for
payment
e) Face Value : The amount stated on the note
f) Maturity Value : Total sum of money which the payee will receive
on the maturity date
FACE VALUE DATE OF NOTE

TERM OF NOTE, after date I promise to pay to the order

of PAYEE Ringgit Malaysia FACE VALUE for value

received with interest at the rate of Interest per annum until

paid
DATE : MATURITY DATE
MAKER
Example 7.1 - 7.4 (page 154)
Bank Discount
• It is common for lenders, such as bank institutional to deduct the interest
charge in advance for short term loans.
• This charged is called bank discount or interest in advance
• The net amount received by the borrower is called the proceeds
• Bank discount is computed in much the same way as simple interest except
that it is based on the final amount or maturity value.
• It can be computed by the following formula:
D = Sdt
where D = bank discount
S = amount of maturity value
d = discount rate
t = term of discount in years
Example 7.5 - 7.8 (page 157)
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 of note is discounted is called the discount date
• The amount received on the date of discounting is called the proceeds.
• The proceeds of a promissory note are computed as follows:

PROCEEDS = MATURITY VALUE - BANK DISCOUNT

 PROCEEDS = MATURITY VALUE - BANK DISCOUNT

Maturity value :- for non-interest bearing notes it is the face value. If

note is interest bearing,
the maturity value = face value + interest

Bank Discount :- D = Sdt where

S = maturity value of the note
d = bank discount rate
t = the discount period or term of discount
Example 7.11 - 7.13 (page 161)
 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 rate gives the same present value for an amount due in the
future
• Thus, if the amount is S, then the present value of S at r% simple
interest rate is S(1 + rt)-1 and the present value of S, at d% bank
discount rate is S(1 - dt).
• refer textbook page 159
Example 7.9 - 7.10 (page 160)