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Lecture Practical business math procedures (11/e) - Chapter 11: Promissory notes, simple discount notes, and the discount process

After reading the material in this chapter, you should be able to: Differentctiiate between interest-bearing and non-interest-bearing notes; calculate bank discount and proceeds for simple discount notes; calculate and compare the interest, maturity value, proceeds, and effeve rate of a simple interest note with a simple discount note; explain and calculate the effective rate for a Treasury bill;. | Chapter Eleven Promissory Notes, Simple Discount Notes, and The Discount Process Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning unit objectives LU 11-1: Structure of Promissory Notes; the Simple Discount Note Differentiate between interest-bearing and non-interest-bearing notes. Calculate bank discount and proceeds for simple discount notes. Calculate and compare the interest, maturity value, proceeds, and effective rate of a simple interest note with a simple discount note. Explain and calculate the effective rate for a Treasury bill. LU 11-2: Discounting an Interest-Bearing Note before Maturity Calculate the maturity value, bank discount, and proceeds of discounting an interest-bearing note before maturity. Identify and complete the four steps of the discounting process. 2 Structure of a Promissory Note 3 Simple Discount Note Terminology Simple Discount Note - A note in which the loan interest is deducted in advance. Bank . | Chapter Eleven Promissory Notes, Simple Discount Notes, and The Discount Process Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning unit objectives LU 11-1: Structure of Promissory Notes; the Simple Discount Note Differentiate between interest-bearing and non-interest-bearing notes. Calculate bank discount and proceeds for simple discount notes. Calculate and compare the interest, maturity value, proceeds, and effective rate of a simple interest note with a simple discount note. Explain and calculate the effective rate for a Treasury bill. LU 11-2: Discounting an Interest-Bearing Note before Maturity Calculate the maturity value, bank discount, and proceeds of discounting an interest-bearing note before maturity. Identify and complete the four steps of the discounting process. 2 Structure of a Promissory Note 3 Simple Discount Note Terminology Simple Discount Note - A note in which the loan interest is deducted in advance. Bank Discount - The interest that banks deduct in advance. Bank Discount Rate - The percent of interest. Proceeds - The amount the borrower receives after the bank deducts its discount from the loan’s maturity value. Maturity Value – The total amount due at the end of the loan. 4 Simple Discount Note Terrance Rime borrowed $10,000 for 90 days from Webster Bank. The bank discounted the note at 10%. What proceeds does Terrance receive? $10,000 x .10 x 90 = $250 360 $10,000 - $250 = $9,750 Proceeds Bank Discount Rate Example: Bank Discount 5 Comparison of simple interest note and simple discount note 6 Comparison of simple interest note and simple discount note Scenario Face value = $18,000 Interest rate = 8% 60 days 7 13 52 Treasury Bills A Treasury bill is a loan to the federal government. Terms of Purchase: 91 days (13 weeks), or 1 year Example: If you buy a $10,000, 13-week Treasury bill at 8%, how much will you pay, and what is the effective rate? $10,000 x .08 x = $200 Cost = $10,000 -- .