5.1 Simple Discount Note


The total amount due at the end of the loan, or the maturity value is the sum of the face value (principal) and interest. Some banks deduct the loan interest in advance from the face value. The borrower will not receive the face value on these types of notes, but will only receive face value less interest, which is called the proceeds. When banks do this, the note is called a simple discount note. The interest charged is called bank discount.

1. Formula to calculate bank discount:

Where,
B – Bank discount (interest taken in advance)
M – Maturity value (Face value of the simple discount note
       / Amount to be repaid at the end of a loan period)
D – Discount rate (interest rate for interest taken in advance)
T – Time in the loan period (in years)


5.1 Simple Discount Note


2. Formula to calculate the proceeds.

Where,
P - Proceeds (Amount received by the borrower for each note)
M – Maturity value (Face Value of the simple discount note)
B – Bank discount

3. Formula to calculate Maturity value and interest of the simple interest note.

Simple interest is found by using the formula:

Where:
M – Maturity value
I – Interest, the amount charged or earned for any loan or deposits.
P – Principal, either the loan amount or the amount invested.
R – Interest rate
T – Time of the loan period (in years)



5.1 Simple Discount Note


Example 1
If two notes exist: One is a 60-day note for RM20,000 discounted at 9%, and the other is a 60-day note for RM20,000 with a 9% simple interest rate. Find the following:

1. Interest owed.
2. Proceeds.
3. Maturity value.

Solution:

The table shows the differences between simple interest and simple discount note.


5.1 Simple Discount Note


Example 2
Alisa signs a simple discount note with a face value of RM 10,500. The banker discounts the 200 days note at
10 ½ %. Find the amount of bank discount and the proceeds.

Solution:



5.1 Simple Discount Note


Example 3
On November 3, Mr. Amjal signed a RM 3,000 note discounted at 5% and is due on March 18 the following year.
Find the time, bank discount and proceeds of the note.

Solution:
1. Find the time period of the note.




5.1 Simple Discount Note


2. Find the bank discount.



3. Find the proceeds of the note.