PHI C201 - Bank Discount

Bank
Discount
Bank Discount
Another way of lending money is to collect the
interest in advance. This interest is referred
into as bank discount. A bank discount is an
interest computed on the maturity value of the
loan and is deducted from the amount at the
loan date to determine the net amount to be
received by the borrower.
The amount of the loan applied for at the loan date is the
maturity value of the loan.
The bank discount is deducted from that amount is the proceeds

– the amount the borrower received. In a sense it is the contrast
of the simple interest, which is altogether paid with the principal
at the maturity date.
Bank Discount
To compute the bank discount;
BD = MV x R x T
Where; BD = Bank discount MV = Maturity Value

R = Bank discount rate T = Time
To compute the Proceeds;
P = MV – BD or P = MV (1 – RT)
Where;
P = Proceed
MV = Maturity Value
BD = Bank Discount
T = Time (converted to fraction or decimals to
facilitate computing)
R = Bank Discount Rate ( converted to decimals for
computation)
Other Derived Formulas:
• Discount Rate (R)

R = BD/FT
• Term of a loan (T)
T = BD/FR
• Amount of loan (F or MV)
MV = P/1-RT or
MV = BD/RT
Discussion Problem 1
Rose Keller availed a P250,000.00 loan at 12% discount rate for

7 months. Find the bank discount and the proceeds of the loan.
Given;
Maturity value = 250,000
Discount rate = 12%
Time = 7 months
Formula;
BD = MV x R x T P = MV - BD
How much should Ruffa borrow to have P15,000 today if she

promised to pay it in 2 years at r= 6 3/7%
Given;
P = P15,000
R = 6 3/7%
T = 2 years
Formula;
MV = P/1-RT
Promissory Notes
A promissory note is a
written promise by the
maker to pay a certain
amount of money to the
payee at a certain specified
time.
It is also a negotiable
instrument which can be sold
to the bank or any lending
agency at a certain specified
discount rate.
Cashing a note at a bank is
called discounting a note.
2 Types of Promissory Notes
•Simple Interest Note

•Bank Discount Note
Simple Interest Note
Below is an example of a simple interest note.
------------------------------------------------------------------------------------------------------------------------
$21,000.00 New York, USA June 1,2006
120 days after date, I promise to pay to the order of

Studio 51 Company, Twenty-one thousands dollars and
xx/100. Dollar per value received with simple interest
at 13% per annum.
Due September 29,2006 Joey Tribiani

------------------------------------------------------------------------------------------------------------------------
To compute for the Maturity value of the note, simply substitute the face value of the note to the
principal in the simple interest formula to get the interest and then add it to the face value. Thus we have;
Interest = FV x R x T
Maturity Value = FV + Interest
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Bank Discount Note
Below is an example of bank discount note;
---------------------------------------------------------------------------------------------------------------------
$13,000.00 New York, Cubao September 18, 2006
100 days after date, I promise to pay the order of Javvu

and Co., Thirteen Thousand and xx/100 Dollars for value
received with bank discount at 14% per annum.
Due December 27,2006 Monica Geller

----------------------------------------------------------------------------------------------------------------------
To compute for the proceeds of the note; simply substitute the face value to the principal in
the Bank discount formula to get the bank discount, then subtract it to the face value. Thus;
BD = FV x R x T
Proceeds = FV – BD
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Discounting Notes before Maturity
As discussed from before, the

lender of the money may
take the notes to a bank and
sell it. This process is called
Discounting a Note.
Discounting a Simple Interest Note
To illustrate the procedure of discounting the simple interest note will use the problem below.
Chandler Bing received a $43,000.00

simple interest note for 7 months at
11% simple interest from his client.
After 4 months, Chandler decided to
cash it in, so the note was discounted
at HSBC at discount rate of 13%. What
are the proceeds Chandler Bing will
receive from the note?
A simple interest rate for 200 days

at 11% per annum has a maturity
value of P18,516. What is the face
value?
Kris Aquino signed a P2,500,000.00 bank

discount note. If the proceeds was P2,230,000.00
and the term was 8 months, at what rate was
interest charged in advance.
Given:
A note for P12,400 dated Face Value = P12,400
January 5, 2003 with interest Date of the Note = Jan.5, 2003
at 9 ½% is due in 210 days. R = 9 ½%
The promissory note is to be T = 210 days
Date of discounting = May 6, 2003
discounted on May 16, 2003
Rate of discount = 9%
at a discount rate of 9%. Find
the following:
1. Interest
2. Maturity Value
3. Maturity Date
4. Term of discount
5. Bank discount
6. Proceeds
Equation Of Values
Rosa Meler owes Joey Trini, P 20,200 due
now and P50,000 due in 5 years with
interest at 5% compounded semi-annually.
He will be allowed to pay off the debt by
paying two equal payments in 3 and 4
years respectively. Find the size of the
payments if money is worth 4 1/2 %
compounded semiannually.
where; O = obligation P = Payments
Solution:

PHI C201 - Bank Discount

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Bank

The bank discount is deducted from that amount is the proceeds

Where; BD = Bank discount MV = Maturity Value

• Discount Rate (R)

Rose Keller availed a P250,000.00 loan at 12% discount rate for

How much should Ruffa borrow to have P15,000 today if she

2 Types of Promissory Notes

•Simple Interest Note

$21,000.00 New York, USA June 1,2006

120 days after date, I promise to pay to the order of

Due September 29,2006 Joey Tribiani

Maturity Value = FV + Interest

100 days after date, I promise to pay the order of Javvu

Due December 27,2006 Monica Geller

As discussed from before, the

Chandler Bing received a $43,000.00

A simple interest rate for 200 days

Kris Aquino signed a P2,500,000.00 bank

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