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CHAPTER 8
PROMISSORY NOTE
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8.1 Promissory Note

A written document made by one person or
party to pay a stated sum of money on a
specified future date to another person or
party.

Are negotiable documents and can be of two
types; interest bearing notes and noninterest bearing notes.

The main features of a promissory note are
as follows:
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1. Maker
The maker is the person that signs the
note.
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2. Payee
The payee is the person to whom the
payment is to be made.
3. Date of the note
The date of the note is the date on which
the note is made.
4. Term of the note
The term of the note is the length of time
until the note is due for payment.
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5. Face value
The face value of the note is the amount
stated on the note.
6. Maturity value
The maturity value of the note is the total
sum of money which the payee will receive
on the maturity date. The maturity value of
a non-interest bearing note is the face
value while the maturity value of an
interest-bearing note is the face value plus
day interest that is due.
7. Maturity date
The maturity date of the note is the date on
which the maturity value is due.
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Example of Promissory Note:
RM 2500.00
20 APRIL 2008
Sixty days after date I promise to pay the
order of
Mohammed Ali
Ringgit Malaysia: Two thousand five hundred
only for value received with interest at the rate
of 8.00% per annum until paid.
No. 1234
Due: 19 June 2008
Mat Jenin
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Example 1:
From the promissory note show in the example,
a) Who is the maker of the note,
b) Who is the payee of the note?
Calculate the maturity value of the note.
Solution:
a) The maker is Mat Jenin.
b) The payee is Mohammed Ali.
Maturity value = face value + interest due
= 2500 + [2500 x 0.08 x (60/360)]
= RM 2533.33
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Example 2:
The maturity value of a 90-day interest bearing
promissory note is RM 1200. If the interest rate is
6% per annum, what is the face value of the note?
Solution:
S = P(1 + rt)
1200 = P[1 + 0.06 x (90/360)]
1200 = P(1.015)
P = RM 1182.27
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Example 3:
The interest rate on a 60-day promissory note is
RM 50. If the interest rate is 5% per annum, find
the face value of the note.
Solution:
I = Prt
50 = P x 0.05 x (60/360)
50 = P(0.008333333333)
P = RM 6000
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8.2 Bank Discount
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
Bank discount is computed in much the
same way as simple interest except that it is
based on the final amount (to be paid back)
or maturity value.
−
Formula: D = Sdt
Where:
D = Bank discount
S = Amount of maturity value
d = Discount value
t = Term of discount in years
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
Bank proceeds is the net amount received
by the borrower.
−
Formula:
Bank proceeds = Maturity Value – Bank
Discount
P=S–D
P = S – Sdt
P = S(1 – dt)
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Example 1:
Alex borrows RM 6500 for 4 months from a lender
who charges a discount rate of 9%. Find,
a) The discount, and
b) The proceeds.
Solution:
a) D = Sdt
= 6500 x 0.09 x (120/360)
= RM 195
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b)P = S – D
= 6500 –195
= RM 6305
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Example 2:
If Sharizan needs RM 5000 now, how much should
he borrow from his bank for 2 years at a 4% bank
discount rate?
Solution:
P = S(1 – dt)
5000 = S(1 – (0.04 x 2))
5000 = S(0.92)
S = RM 5434.78
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Example 3:
Sheela receives an invoice of RM 2000 with cash
discount terms 3/10, n/40.
a) How much should be borrowed for 30 days
from a bank that charges a 9% discount rate to
take advantage of the cash discount?
b) How much will be saved by borrowing the
money to take advantage of the cash
discount?
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Solution:
a) Cash discount offer = 2000 x 3% = RM 60
To get proceeds of RM 1940 (RM 2000 – RM
60), she should borrow more than RM 1940.
Let the amount borrowed for 30 days be S
ringgit.
P = S(1 – dt)
1940 = S[1 –( 0.09 x (30/360))]
S = RM 1954.66
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b) Bank discount for the loan
= RM 1954.66 – RM 1940
= RM 14.66
Amount that will be saved
= RM 60 – RM 14.66
= RM 45.34
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Example 4:
Find the present value of RM 1000 due in 3 years
at
a) A simple interest rate of 6%, and
b) A simple discount at 6%.
Solution:
a)
b)
P = S(1 + rt)-1
P = 1000(1 + (0.06 x 3))-1
P = RM 847.46
P = S(1 – dt)
P = 1000(1 – (0.06 x 3))
P = RM 820
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8.3 Simple Interest Rate Equivalent to
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Bank Discount Rate

At interest rate, r% and a discount rate, d%
are said to be equivalent if the two rates give
the same present value for an amount due in
the future.

If the present value is S, then the present
value of S, at r% simple interest rate is
S(1 + rt)-1 and the present value of S, at d%
bank discount rate is S(1 – dt).

Equating the two present value, we get:
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S(1 + rt)-1 = S(1 – dt)
1 = 1 – dt
1 + rt
Solving for d, we get
dt = 1 –
1
1 + rt
dt = rt
1 + rt
d= r
1 + rt
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Solving for r, we get
1 + rt = 1
1 – dt
rt = 1
1 – dt
rt = dt
1 – dt
r= d
1 - dt
-1
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Example 1:
A bank discounts a RM 3000 note due in 3 months
using a bank discount rate of 8%. Find the
equivalent simple interest rate that is charges by
the bank.
Solution:
r= d
1 – dt
r=
0.08
[1 – (0.08 x (90/360))]
= 8.16%
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Example 2:
What discount rate should a lender charge to earn
an interest rate of 15% on a 6 months loan?
Solution:
d= r
1 + rt
d=
0.15
[1 + (0.15 x (180/360))]
d = 13.95%
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8.4 Discounting Promissory Notes

A promissory note can be sold to a bank
before its maturity date if the holder is in
need of cash.

Selling the note to the bank is called
discounting the note.

The amount received on the date of
discounting is called the proceeds.

The proceeds of a promissory note are
computed as follows:
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a) Find the maturity value of the note.
For non-interest bearing note, it is the face
value. If the note is interest bearing, then
Maturity value = Face Value + Interest
b) Find the bank discount, D with the formula
D = Sdt
c) Compute the proceeds
Proceeds = Maturity Value – Bank Discount
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Example :
Mr. Lee received a promissory note for RM 2600
with interest at 8% per annum that was due in 180
days. The note was dated 20 June 2005. The note
was discounted on 24 July 2005 at a bank that
charges 11% discount. Determine
a) The maturity date,
b) The maturity value,
c) The discount period, and
d) The proceeds.
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Solution:
a) Maturity date = 20 June 2005 + 180 days
= 17 December 2005
b) Maturity value = P(1 + rt)
= 2600[1 + (0.08 x (180/360))]
= RM 2704
c) Discount period = 24 July 2005 to 17 Dec 2005
= (7+31+30+31+30+17)
= 146 days
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d) D = Sdt
= 2704 (0.12 x (174/360))
= RM 156.83
Proceeds = Maturity value – Bank discount
= 2704 – 156.83
= RM 2547.17
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