5.2 Differences Between Simple Interest and ...

The process of discounting a simple interest note before maturity involves a three-party arrangement, such as manufacturer, retailer and bank.

For example, a manufacturer delivered furniture to a retailer in March, 2011. The manufacturer did not request cash payment from the retailer immediately. The payment for the furniture is due in September. In return, the manufacturer accept simple interest note to affirm the debt. However, the manufacturer will have its money tied up in this furniture until September.

If the manufacturer needs cash sooner than September, the manufacturer will have to sell the note to a bank before it matures. The manufacturer is discounting the note before it matures.

The bank will buy the note at a discounted price by charging some fee called bank discount. The bank gives the maturity value of the notes minus a fee charged by the bank for the service. The actual amount received by the manufacturer is called proceeds. The bank will received the full maturity value from the retailer when it is due in September.

5.2 Differences Between Simple Interest and ...

The steps involved for discounting a simple interest note are as follows:

1.	Find the maturity value of the original note.
2.	Find the discount period.
3.	Find the discount.
4.	Find the proceeds.

5.2 Differences Between Simple Interest and ...

Example 4
Anis Holdings received a RM 10,200, 7.5%, 200-day promissory note dated June 15 from a retailer. The note was discounted on October 22 at a national bank. The bank discount rate was 11%. Calculate:

1.	The maturity value of the simple interest note.
2.	The discount period.
3.	The bank discount.
4.	The proceeds.

Solution:

1.	Maturity value.

5.2 Differences Between Simple Interest and ...

The discount period.
To calculate discount period, first, we need to know the maturity date of the note. The maturity date of the note is found as:

Day 166 (June 15) + 165 days = 331 (27 November)

Discount period is the time from the day the note is sold (October 22) to the maturity date of the loan (27 November).

The discount period is 36 days.

5.2 Differences Between Simple Interest and ...

3.	The bank discount. The discount is computed by using the discount period of 36 days and the 11% discount rate.
4.	The proceeds. Proceeds are the amount of money received by Anis Holdings from the bank.