[FDNBUSF] Unit 2: Simple Discount

Interest

cost of borrowing money for periods of time

Lenders

charge interest as a rental fee on borrowing money

Lenders

require borrowers to sign a promissory notes

Promissory Note

a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date

Promissory Note

contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.

Interest-Bearing notes

must state the rate of interest

Face value

amount of money borrowed

Face value

also the principal of an interest-bearing note

Face value

also the maturity value of a non-interest-bearing note

Term

length of time that the money is borrowed

Date

the date that the note is issued

Payee

the company extending the credit

Rate

the annual rate for the cost of borrowing the money

Maker

the company issuing the note and borrowing the money

Maturity date

the date the principal and interest rate are due

Non-Interest-Bearing notes

occur for short time periods under special conditions

Non-Interest-Bearing notes

a note or bond with no stated interest rate on its face

Non-Interest-Bearing notes

interest is implied in the face value of the note

Simple Discount Note

note in which the loan interest is deducted in advance

Bank Discount

the interest that banks deduct in advance

Maturity Value

the total amount due at the end of the loan (the sum of the face value, or principal)

Proceeds

the amount the borrower receives after the bank deducts its discount from the loan’s maturity value

Bank Discount Rate

the percent of interest

Any promissory note

A promissory note for a loan with a term of usually less than 1 year. Ex.: 60 days

Simple Interest Note

Paid back by one payment at maturity. Face value equals actual amount (or principal) of loan (this is not maturity value).

Simple Discount Note

Paid back by one payment at maturity. Face value equals maturity value (what will be repaid)

Simple Interest Note

Interest computed on face value or what is actually borrowed.

Simple Discount Note

Interest computed on maturity value or what will be repaid and not on actual amount borrowed.

Simple Interest Note

Maturity value = Face value + Interest

Simple Discount Note

Maturity value = Face value

Simple Interest Note

Borrower receives the face value

Simple Discount Note

Borrower receives proceeds = Face value − Bank discount.

Simple Interest Note

True rate is same as rate stated on note.

Simple Discount Note

Effective rate is higher since interest was deducted in advance

Simple Interest Note

Used relatively frequently.

1969 congressional legislation

required that the true rate of interest be revealed

Simple Discount Note

Still used where the 1969 congressional legislation does not apply, such as personal loans.

Treasury bill

a loan to the federal government

contingent liability

potential liability that may or may not result from discounting a note

Bank Discount

bank’s charge

13 weeks

Treasury bills are a loan to the federal government for _____

Interest-bearing notes

The simple interest formula is used to calculate this note

Simple discount note

Treasury bills (T-bills) are what type of note?