LESSON 5
SIMPLE DISCOUNT NOTE
Learning Outcomes
•
By the end of this lesson, students should be
able to:
– Define the basic terms used with simple discount
note.
– Differentiate between simple interest and simple
discount note.
– Calculate the bank discount and proceeds.
– Find the face value.
– Understand the concept of discounting a note.
•
Find the proceeds when discounting a simple
interest note
List of Topics
◦ Simple discount note.
◦ Differences between simple interest and
simple discount note.
◦ Calculate the bank discount and proceeds.
◦ Find the face value.
◦ Understand the concept of discounting a
note.

Find the proceeds when discounting a
simple interest note
Simple discount note
•
The total amount due at the end of the loan,
or the maturity value is the sum of the face
value (principal) and interest. Some banks
deduct the loan interest in advance from the
face value. The borrower will not receive the
face value on these types of notes, but will
only receive face value less interest, which is
called the proceeds. When banks do this,
the note is called a simple discount note.
The interest charged is called bank
discount.
Contd…
•
Formula to calculate bank discount:
B =MDT
Where,
B – Bank discount (interest taken in
advance)
M – Maturity value (Face value of the simple
discount note / Amount to be repaid at the
end of a loan period)
D – Discount rate (interest rate for interest
taken in advance)
T – Time in the loan period (in years)
Contd…

Formula to calculate the proceeds.
P =M-B
Where,
P - Proceeds (Amount received by the
borrower for each note)
M – Maturity value (Face Value of the
simple discount note)
B – Bank discount
Contd….
Formula to calculate Maturity value and interest
of the simple interest note.
• Simple interest is found by using the formula
• M = P +I and I =PRT
Where:
M – Maturity value
I – Interest, the amount charged or earned for
any loan or deposits.
P – Principal, either the loan amount or the
amount invested.
R – Interest rate
T – Time of the loan period (in years)
•
Example
If two notes exist: One is a 60-day note
for RM20,000 discounted at 9%, and the
other is a 60-day note for RM20,000 with
a 9% simple interest rate. Find the
following:
 Interest owed.
 Proceeds.
 Maturity value.

Simple discount note
1.
Interest
Simple Interest Note
1.
Interest
Simple Interest Note
I  PRT
 RM 20,000  9% 
Simple discount note
B  MDT
60
360
 RM 20,000  9% 
 RM 300
1.
Proceeds
PM B
 RM 20,000  300
 RM 19,700
1.
Maturity Value
Pr incipal  Face Value
 RM 20,000
60
360
 RM 300
1.
Proceeds
Maturity value  Face Value
 RM 20,000
1.
Maturity value
M PI
 RM 20,000  300
 RM 20,300
Discounting a Simple Interest Note before Maturity
•
•
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
Steps for discounting simple interest
note
The steps involved for discounting a
simple interest note are as follows:
 Find the maturity value of the original
note.
 Find the discount period.
 Find the discount.
 Find the proceeds.

Example
•
•
•
•
•
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:
The maturity value of the simple interest
note.
The discount period.
The bank discount.
The proceeds.
Maturity value
I  PRT
200
 RM 10,200 0.075
360
 RM 425
M  PI
 RM 10,200 RM 425
 RM 10,625
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).
November 27
331
October 22 -295
=36 days
The discount period is 36 days
The bank discount

The discount is computed by using the
discount period of 36 days and the 11%
discount rate.
B  MDT
36
 RM 10,625 0.11
 RM 116.88
360
The proceeds

Proceeds are the amount of money
received by Anis Holdings from the bank.
P =M –B
RM 10,625 –RM 116.88 = RM10,508.13
Lesson Summary
•
•
This topic explains the discount note and its
calculation. Students would be able to
compute a discount note and the proceeds if
discount notes cases are presented its
maturity.
The next topic would cover the lesson on
compound interest. The interest charged is
compounded over the length of the loan
period, thereby making it grow bigger than
simple interest.