Business Math

Discounted Promissory Notes

Section 4-2
Discounted Promissory Notes-Goals
Calculate the interest and proceeds for
discounted promissory notes
Calculate the true rate of interest on a
discounted promissory note
Discounted Promissory Notes
Banks and other lenders may lend money to
businesses and people for short periods of
time, such as 30, 60, or 90 days.
These loans are called short-term loans.
When a bank makes a short-term loan, it
may require the borrower to sign a note and
pay the interest when the loan is made.
Discounted Promissory Notes
When interest is collected in advance, it is
known as a bank discount.
Because the interest is paid in advance, the
note itself does not show any interest rate,
and it is called a noninterest-bearing note.
Discounted Promissory Notes
The bank collects the bank discount by deducting
it from the principal, or face, of note.
The amount the borrower gets is the principal of
the note less the discount.
When the loan is due, only the principal of the
note is paid.
Obtaining a loan in this way is known as
discounting a note.
Discounted Promissory Notes
The percent of discount charged by the bank
is the rate of discount.
The amount of money that the borrower
gets is the proceeds.

Principal × Rate of Discount = Bank Discount

Principal – Bank Discount = Proceeds

Discounted Promissory Notes
A bank discounted $9,600 noninterest-
bearing note for Matt at 10% interest for 9
months. Find the proceeds of the note that
Matt receives.
 Discounted Promissory Notes
When you discount your own noninterest-bearing
note, you pay a rate of interest based on the
principal.
However, you do not get the full principal because
interest is deducted in advance.
To find the true rate of interest you paid, you must
divide the interest paid (bank discount) by the
amount you actually received (proceeds).
True Rate of Interest = Interest ÷ Actual Amount Borrowed
(Bank Discount) (Proceeds)
Discounted Promissory Notes
Michael signed a $25,000 noninterest
bearing note on March 17. He discounted
the note at 14% and paid the principal back
6 months later. He received $23,250 as
proceeds. What true rate of interest, to the
nearest tenth of a percent, did Michael pay
on the note?
Discounted Promissory Notes
Your bank discounted your 4-month,
$2,600, noninterest bearing notes. The
discounted rate was 12%. You received
$2,496 as proceeds. What true rate of
interest, to the nearest tenth of a percent, did
you pay on the note?
Discounted Promissory Notes
Homework
Pg 142/ 11-19 odds, 20-22