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4 Prom Notes

The document discusses promissory notes, including examples of calculating simple interest on a note, finding the face value of a note given the maturity value, and calculating the discount rate on a note discounted in advance. It also provides an example of discounting a promissory note before maturity, including constructing a time diagram. Bank drafts and treasury bills are also briefly defined.

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hadukenryu9761
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209 views

4 Prom Notes

The document discusses promissory notes, including examples of calculating simple interest on a note, finding the face value of a note given the maturity value, and calculating the discount rate on a note discounted in advance. It also provides an example of discounting a promissory note before maturity, including constructing a time diagram. Bank drafts and treasury bills are also briefly defined.

Uploaded by

hadukenryu9761
Copyright
© © All Rights Reserved
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Download as DOC, PDF, TXT or read online on Scribd
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PROMISSORY NOTES

Example 1.5.3

1. Determine the following: Simple Interest Note with beginning date on Nov.12,
2010.
a. Maturity date
b. Interest
c. Maturity value or F

Given: Drawer of the note Ric Santos


Drawee Marc C. Ramirez
Face Value P15,000
Interest rate 12% = 0.12
Term 90 days

Solution:
a. From Table I
From Nov. 12, 2010 to ________, 2011 = 90 days

Look for the date that corresponds to 90 days after Nov. 12, 2010.
Maturity date = ____________

b. I = Prt c. F = P + I

= 15,000(0.12)( ) = 15,000 + 450

= P 450 = P 15,450

Example 1.5.3

A simple interest rate for 120 days at 12.6% per annum has maturity value
of P7, 815. What is the face value?

Given: Maturity Value (F) = P7, 815


Term = 120 days
= 120/360 year
Interest rate (r) = 12.6% = 0.126

Find the Face Value (P).


F = P(1 + rt)

P =

=
=

P 7, 500
Example 1.5.4

Fely Yu signed a P10,000 bank discount note. If the proceeds


Was P8, 875 and the term was 10 months, at what rate was interest charged in
advance?

Given: F = P10, 000


P = P8, 875
T = 10 mos. = 10/12 = 5/6 yr

Find d. Id = F–P
= 10, 000 – 8, 875
= P1, 125

From Id = Fdt, d =

Substitute the given values to obtain d.

d =

= 0.135 x 100
= 13.5%

DISCOUNTING PROMISSORY NOTES

If the holder of a promissory note needs money before its maturity,


he can have the not discounted or sold at a discount to a third party
even before its maturity. This discount is equivalent to the interest-in-
advance. The time from the day a note is bought or discounted to the
maturity date is called the TERM OF THE DISCOUNT.

The security behind a note is increased each time a temporary


owner sells the note. Thus a not can be sold and resold.

To discount a promissory note at the discount rate d, first,


compute the maturity value F and the maturity date, then find the term
of the discount, let this time be t years and discount F for t years using
the formulas I = Fdt and P = F – I. DISCOUNTING means getting
the present value P of a sum due in the future, hence the formula used
is P = F – I.

Example 1.5.5

A 6-month note with a face value of P10,000 bears interest


at 13 ½%. The note is discounted 60 days before maturity at a
discount rate of 12 1/2 %. Find the proceeds.

Solution:

Given Face = 10,000


r = 13 ½ = 0.135
t = 6 months = 180 days
Discounted at:
d = 12 1/2 % = 0.125
t = 60 days before maturity

In discounting promissory notes, it is necessary to make a time diagram. A time


diagram helps in the analysis and the solution to problems as we can keep track
easily and accurately the different sums and the points in time at which these sums
have particular peso values.
6 months

Part 1:

Face Value add interest for 6mo Maturity Value

days at 13 ½ %

First find the maturity value F.

F = P(1+rt)
= P10,000[1+(0.135)(6/12)]
= P10,000(1+0.0675)
= P10,000(1.0675)
= P10,675

Part 2:

10,000 10,675

60 days

start of term Proceeds (P) end of term


Then find the discount 60 days before maturity

Id = Fdt
Id = P10,675(0.125)(60/360)
= P10,675(0.0208333)
= P222.40

Solve for the Proceeds

P = F-Id
= P10,675 – P222.40
= P10,452.60

Thus, the proceeds and the seller of the note received was P10,452.60, while the
buyer of the note will receive P10,675 at the maturity date. Both the first owner of
the note(seller) and the buyer earned interest. The seller earned P452.60
(P10,452.60 – P10,000) simple interest, while the buyer earned P222.40(P10,675 –
P10,452.60) simple discount.

BANK DRAFTS are cheques payable on demand, drawn by or on behalf of a bunk


upon another bank. The safety of the issuing bank enables bank draft to be
regarded as cash.

TREASURING BILLS are bills of exchange which are issued by the treasury(Banko
Sentral ng Pilipinas or BSP) in order to raise money to recover expenses of the
state.

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