CHAP.

3 UPDATE (DISCOUNT) 35

UNIT 3
UPDATE (SIMPLE AND COMPOUND DISCOUNT)

If there is a credit document of N$ signed by a third party that expires within periods, and
one wishes to dispose of the money that the document represents before the due date, said document
must be deducted.
The discount is the difference between the value written in the document called nominal value (N, value
future) and the value received (present value, V) for having discounted it before its maturity.
D=N-V (3-1)
In the update, there are two types of discounts: Simple and Compound.

SIMPLE DISCOUNT
This type of discount is applied at simple interest. It is divided into: Commercial and Rational.
Commercial Discount
It is the simple interest calculated on the nominal value (N)
Dc = N* i * n (3-2)
Where from: N = Dc / (i * n) (3-3)
i = Dc / (N * n) (3-4)
n = Dc / (N * i) (3-5)
We know that: Dc = N - Vc
therefore: Vc = N(1 - i * n) (3-6)
where from: N = Vc / (1 - i * n) (3-7)
n = (N - Vc) / (N*i) (3-8)
i = (N - Vc) / (N*n) (3-9)

2. Rational or Mathematical Discount

It is the simple interest that is calculated on the present value (V)
Dr = Vr * i * n (3-10)
from where Vr = Dr / (i * n) (3-11)
i = Dr / (Vr * n) (3-12)
n = Dr / (Vr * i) (3-13)
we know that : Dr = N - Vr where:
N = Vr (1 + i * n) (3-14)
from where: Vr = N / (1 + i * n) (3-15)
i = (N / Vr – 1) / n (3-16)
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CHAPTER 3 UPDATE (DISCOUNT) 36
n = (N / Vr – 1) / i (3-17)
Note:
Dc > Dr
The commercial discount is a non-reversible operation.
Rational discounting is a reversible operation and is the one that should be applied in reality.
The commercial discount is the one that is frequently used in practice, but for
operations carried out in the SHORT TERM and with not very high interest, because of that
Conversely, it may happen that a current value is obtained as null, which would be absurd. Therefore
when the discount is applied in the LONG TERM, compound discount is used.

COMPOUND DISCOUNT

These discounts are applied using compound interest; applicable to long-term operations.
The following formulas apply.
N = V (1 + i)n (3-18)
where from V = N / (1 + i) (3-19)
n = ( log N – log V)/log(1+i) (3-20)
i = antilog [ (log N - log V) / n ] - 1 (3-21)
Using sub-periodic capitalization, we have:
N = V(1 + i)m*n (3-22)

EQUIVALENCE OF COMMERCIAL DISCOUNTS

If you want to replace several documents with a single new document, the latter can only
differ from others either in nominal value or in their maturity period, since the values
Current ones must be equivalent (equal) and the interest rate the same, there are two types of
equivalence with common maturity and average maturity:

1.- COMMON EXPIRATION

If the nominal value of the new document does not match the sum of the nominal values of the
given documents, we will be in the case of common expiration. That is:
Nt
N ≠ t =1

In the common maturity, the unknowns can be two: the nominal value and the maturity period.
that will be calculated with the following equations:

a) In the Commercial Discount

N 1(1−i*n1) + N2(1−i*n2)+.......+Nt(1−i*n)
t
N= (3-23)
1 - i * n

N − [ N 1(1 − i*n1) + N 2(1 − i*n2) + .... + N t(1 − i*nt) ]

n= (3-24)
N*i
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CH. 3 UPDATE (DISCOUNT) 37
b) In Compound Discount

N = N 1(1 + i) n −1
+N 2 (1+ i)n−n2 +.....+N t (1+ i) −nnt (3-25)

N1 N2 Nt
logN − log n1
+ n2
+ .... +
n= (n + i) (1 + i) (1 + i) n t (3-26)
log (1 + i)

2. AVERAGE MATURITY
If the nominal value of the new document matches the sum of the nominal values of the
documented given, we are in the case of the average maturity. That is:
Nt
N= t =1

At the average maturity, the only unknown is the value of time (n), which is calculated with the
following equations:
a) In the Commercial Discount

(N 1 + N 2 + .... + N) − [ N 1(1 − i*n1) + N 2 + i*n2) + ... + N t(1 − i*nt) ]

n= (3-
(N 1 + N 2 + .. + N t) *i
27)
b) In Compound Discount
N1 N Nt
log(N1N+ 2....N+t) log
+ − n1
+n 2 + .... +
n= (1 + i) (1+i) 2
(1 + i) n t (3-28)
log(1 + i)

DISCOUNT RATE (d)

The discount rate or upfront interest rate is applied to a future value and then applied
this future value transforms into a present value. In contrast, the interest rate or overdue rate is
applies to a current value, and once applied, that current value is transformed into a value
future. Therefore ≠ d, additionally > d.
The fundamental formula is:
V' = N(1-d) n
(3-29)
Relationship between interest rate and discount rate
d = i /(1+ i) (3-30)
i = d /(1-d) (3-31)

RESOLUTION TO PROPOSED PROBLEMS

What is the value that a document replacing two others that expire in 4 days should have?
months and 6 months, whose nominal values are, respectively, $1,000 and $1,300?. The rate
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CHAP. 3 UPDATE (DISCOUNT) 38
the monthly rate is 2% and the due date of the new document is in 5 months,
applying the trade discount.
Solution. We have an equivalence problem, with a common due date and commercial discount.
Data: N 1(1 − i*n1) + N 2(1 − i*n2)
N =? N= (3-23)
n = 5 months 1 − i*n
N1=1.000$ 1000(1 − 0.02*4 +1300(1−0.02*6)
n14 months N=
1 − 0.02*5
N2= 1.300$
n26 months N= 2,293.33$ (Solution)
i = 0.02 monthly

Mr. M buys a machine paying $1,500 as a down payment and $3,200 in 8 months.
wants to know what the cash value of that machine is, if the interest applied is 24% per year with
monthly capitalization.
Reasoning and Solution. When talking about sub-periodic capitalization, we are talking about discount.
composed
Data: 0 1 2 3 4 5 6 7 8
Operation 1:
V11500 $ 1,500
n10 months Update 3.200
Operation 2
VT
N2= 3.200 $
n28 months = 0.667 years VT= V1+V2replacing eq (3-22) in V2
i = 0.24 annual VT= V1+ N2(1+i/m)m*n 2

3.200
m = 12 V t = 1.500+(1+ replacing data
0.24/128.004

VT= ? VT4,231.17$ (Solution)

3.B has to settle a debt of $15,000 by making 3 payments: the first one is $2,000.
corresponds to the date on which the loan is received; the second payment is $5,000 and is made to
the 6 months and the third payment is made after 10 months. It is desired to know the amount of the third payment,
for a monthly interest of 2.5%.

Solution. We have a compound discount problem.

Data: 15,000
VT15,000$ 1 2 3 4 5 6 7 8 9 10 months
Operation 1
V 1 = 2000$
X
n1= 0 months 2.000 5,000

VT= V1+ V2+V3

Replacing equation (3-18) in V2y V3
Operation 2 N2 N3
N25,000 $ VT= V +1 n2
+ replacing data,
n26 months (1 + i) (1 + i) n 3
5,000 X
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operating
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CHAPTER 3 UPDATE (DISCOUNT) 39
Operation 3
N 3 =? 15,000 = 2,000 + 4,311.48 + X / 1.28008 solving for X
n 3 = 10 months X = (15,000 - 2,000 - 4,311.49) * 1.28008 operating
i = 0.025 monthly 11,122.03 $ (Solution)

4.M can sell a piece of land for a cash payment of $3,500, or alternatively, for $1,200 in installments.
told and $3,000 in a year. Determine which option is more advantageous for M.
assuming that the interest is 24% compounded monthly.
Reasoning and Solution This problem is about compound discount. To compare the options it is
recommended to do it in year 0, because it is only necessary to do calculations in the 2nd option
Data: 0 1 year
First option
VT3.500$ month zero
2nd option
1,200 Update
Operation 1:
V11,200 $ 3,000
n1= 0 months VT= V1+ V2replacing in the ec- (3-18) in V2
Operation 2: VT= V +1 N /(1+i
2 /m)m*nreplacing
2 data,
N 2 =3000$ VT=1.200+3.000/(1+0,24/12) 12
n2 = 1 year VT=3.567,48$ option 2
i = 0.24 annual As it is being sold, we choose the highest value.
m = 12 that is: the second option (Solution)

5. In the previous problem, if M is offered $2,500 now and, after a year, another sum to
determine by M. What would be the minimum amount to demand in order not to lose compared to the best
previous alternative?
SolutionIn order to not lose compared to the best previous alternative, the present value must be equal to
3,567.48$. Just like the previous problem:
Data:
VT= V1+ V2 replacing in the eq (3-18) in V2
VT3,567.48$
Operation 1 VT= V1+ N2/ (1+ i/m)m*n 2 replacing data
V12.500$
3,567.48 + 2,500 + N2(1+0.24/12)12*1 sorting
n10 years
Operation 2 3,567.48 - 2,500 = 0.7885 N2
N2=?
N2=1067,48 / 0.7885
n21 year
i = 0.24 annual N21,352.8$ solution
m = 12

6.B has two documents that it redeems for another whose nominal value is $3,522 and that expire within
The first document to be replaced is worth $2,000 and matures in 2 months.
months, while the second document expires in 6 months. Calculate the nominal value
from the second document knowing that the monthly compound interest rate is 2%

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CHAPTER 3 UPDATE (DISCOUNT) 40
Reasoning and solution. We have a problem of equivalence with a common due date with
compound discount
Data: N = N 1(1+i) n −n1 + N 2(1+i)n −n2 ec(3-25)
N = 3522$ replacing data:
n = 4 months 3.522 = 2.000 (1+0.02) 4 2 + N 2(1+0.02) 4 6
N 1 = 2.000 $ 3.522 = 2,080.8 + 0.961 N 2 ordering
n 1 = 2 months 0.961 N 2= 3.522 - 2.080.8
N 2 =? 0.961 N 2= 1,441.2
n26 months N 2 = 1441,2/0.961
i = 0.02 monthly N 2 = 1.199,42 (Solution)

Mr. M has two documents, one for $800 and another for $1000, which will mature in 2 and 6 months.
respectively. Determine what the due date would be for a $2000 document that
replace the previous ones in a compound interest regime at a monthly rate of 2%
Reasoning and Solution As N ≠ N1 + N
2 we have a common maturity with discount
composed
Data N1 N
logN − log +n 2
N 1 = 800 $ n= n1
(1 + i) (1+i) 2
(3-26)
n 1 = 2 months log(1 +
N 2 = 1.000 $
n 2 = 6 months 800 1000
log2000 − log +
N = 2,000$ n= (1 + 0.02)2(1 + 0.026
n=? log(1 + 0.02)
i = 0.02 monthly
log 2.000 − log (768, 94 +887.97
n= log (1.02)

n = 9.5 months (solution)

8.B promised to lend M $20,000 to be repaid in a year with an annual interest of 20%. When
M receives the loan, B deducts the respective interests, which is why the value received
For M, it is $16,000 and it is desired to know the actual interest that M is paying on the loan.
20,000$.
Solution d
Data: i= (3-31)
1 −d
V 1 = 16.000$
0.20
N = 20,000$ i=
1 −0.20
n = 1 year
d = 0.20 annual i = 0.25 = 25% per year solution

9. In the previous problem, what would be the actual amount of the loan such that the interest paid
If about $16,000 is 20% annual
Solution N = V(1 + i)n (3-18)
Data: N = 16.000 (1+0.20)
N=? Operating:
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CHAPTER 3 UPDATE (DISCOUNT) 41
16.000$ N = 16.000 * 1.20
n = 1 year N = 19.200 $ solution
i = 0.20 annual

10. A document of $10,000 due in 13 months needs to be discounted. What is advisable?

but: discount it at 2.5% with interest rate or at 2.4% with discount rate?

Solution We calculate the present values and compare them; the lower one will be more convenient:

Data With interest rate: V = N/(1+i) n

(3-19)
10,000$ V = 10,000 / (1 + 0.025)13
V=?
n = 13 months V = 7,254.20 $ 1st option
V' = ? With discount rate: V' = N (1-d) (3-29)
i = 0.025 monthly V' = 10.000 (1-0.024)13
d = 0.024 monthly
7,292.02$ 2nd option
The second option is advisable. (Solution)

11. A $10,000 document is discounted 14 months before maturity at 6% per month. Calculate the
current value of the document, using: a) commercial discount; b) rational discount; c)
Discount with interest rate; d) Compound discount with discount rate. Compare,
Furthermore, the results obtained and analyze the interest rates that should have been used in
the different discounts to obtain a present value equivalent to that obtained in the
commercial discount.
Solution a) Vc = N(1 - i * n)
Data
Vc = 10,000 (1 - 0.06*14) (3-6)
N = 10,000$
n = 14 months 1,600 $ (Solution)
i = 0.06 monthly
b) Vr = N/(1+ i n) (3-15)
V=?
commercial discount Vr = 10,000 / (1 + 0.06 * 14)
rational discount
Vr = $5,434.78 (Solution)
c) compound discount
d) compound discount c) V = N / (1 + i) n (3-19)
with d = 0.06
V = 10,000/(1+0.06) 14
4.423 $ (Solution)
d) V' = N (1-d) (3-29)
V' = 10.000 (1 - 0.06) 14

V' = 4,205.23 $ (Solution)

12. It is desired to know what the single payment to be made in 3 months is that should replace 3 payments.
of $10,000; $2,000 and $4,000 due in 5, 6 and 7 months respectively, which are settled
a financial debt agreed at 7% monthly in advance with compound interest (d = 0.07)
.
Solution. This problem is about equivalence with common maturity with compound discount.
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CHAPTER 3 UPDATE (DISCOUNT) 42
First, we must calculate the interest rate (i).
Data: i = d/(1-d) (3-31)
N=?
n = 3 months i = 0.07/(1-0.07) = 0.0752
N11.000 $ N = N 1(1+i) n −n1
+ N 2(1+i)n −2
+ N 3(1+i)n −n3
(3-25)
n15 months
N2= 2.000 $ N = 1.000 (1 + 0.0752)
3 5
+2.000 (1+0.0752) 3 6
+ 4000(1+0.0752)
n327= 6 months
N34.000 $
n37 months N = 864.9 + 1,608.71 + 2,992.21
N = 5,465.82 $ (Solution)

I must pay $3,000 within 2 months and $5,000 within 7 months, including interest.
advanced composed of 6% monthly (d = 0.06) if according to the creditor it is decided
replace both payments with a single one to be made in 4 months, what will be the value of that
one-time payment?

Solution This problem is identical to the previous one, therefore:

Data: i = d / (1-d) (3-31)
N 1 = 3.000$
i = 0.06 / (1 - 0.06) = 0.0638
n 1 = 2 months
N 2 = 5.000$ N = N 1(1+i) n −n1
+N 2 (1+i)n −n2
(3-25)
n 2 = 7 months
N = 3.000 (1 + 0.0638)4 2
+5.000 (1+0.0638) 4 7
d = 0.06 monthly
N=? N = 3,395.20 + 4,152.92
n = 4 months N = 7,548.12 $ Solution

14. Two documents of $4,000 and $6,000 that mature in 3 and 5 months, respectively, are
replaced by a single one to be paid within 6 months. Calculate its amount, if an agreement is reached with a
5.66% interest compounded monthly in advance. Also perform the same calculation with the
respective overdue interest rate.

Solution This problem is identical to the previous one, therefore:

Data:
i = d / (1-d) (3-31)
N 1 = 4,000 $
n 1 = 3 months i = 0.0566 / (1 - 0.0566) = 0.0599
N 2 = 6,000 $ N = N 1(1+i) −n1
+ N 2(1+i)n −n2
(3-25)
n 2 = 5 months
N=? N = 4.000 (1+0.0599) 6 3
+ 6.000(1+0.0599) 6 5

d = 0,0566% N = 4,764 + 6,359.98 $

N = 11,123.98 $ (Solution)

15. Mr. Z has a $10,000 receivable due in 6 months and decides to discount it.
paying them 7% monthly in advance compounded. With the money received, make a
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CHAPTER 3 UPDATE (DISCOUNT) 43
investment for 6 months in a bank that pays 8% monthly interest in a regime of
compound interest. It is desired to know if Mr. Z made a favorable transaction, and also
It is desired to know the monthly interest rate that equates both options.
Solution. a) First we discount the document whose value will be the initial capital (Co) for the
second operation. To know if a convenient operation was performed, we compare N with Cn.
Data: * V' = N (1-d) n ec.(3.29)
1st operation V' = 10,000 (1 - 0.07)6
Discount 6,469.9 $
N = 10,000 $ * Cn = Co (1 + i)
d = 0.07 monthly
Cn = 6,469.9 (1+0.08) 6
n = 6 months
V' = ? 10,266.9 $
2nd operation
Deposit to: As Cn >N the operation was convenient
i = 0.08 monthly
n = 6 months −
logCnlogC
b) i = antilog ( ) -1 (1.4)
Co = V’ n
Cn =? log10000 - log6.469.9
was it convenient? i = antilog ( ) -1
6
b) i = ?for which Cn = N
i = 0.07527 = 7.527% (Solution)

16. Indicate what is more convenient: a) Discount 5 months before the maturity of a $10,000 document at 8%
monthly in advance and place the proceeds for 3 months at 8.5% monthly, or b)
apply that same discount directly 2 months before expiration, in a compound regime.
Calculate, furthermore, the monthly interest rate at which the other option becomes advantageous.
Solution. Option 1: First we discount
Data: a) V' = N (1-d) = 10,000 (1-0.08) 5

Option 1 V' = $6,590.82

N = 10,000$
n = 5 months Capitalizing:
d = 0.08 monthly Cn = Co (1+ i) n
V' = ?
Capitalization 6,590.82 (1+0.085) 3

Co = V’
8,418.38 $
n = 3 months
i = 0.085 monthly Operation 2: only discounted
Cn =?
V' = N (1-d) n= 10,000 (1-0.08) 2
Operation 2
N = 10,000 $ V’= 8.464 $
n = 2 months
The second option is the most convenient
d = 0.08 months
? b) logCn − logCo
Data: b) i = antilog ( ) -1
n
i=?
8.464 $
Co = $6,590.82
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CHAP. 3 UPDATE (DISCOUNT) 44
log8.464 − log6.590.82
i = antilog ( ) -1
3
i = 0.08695 = 8.69 % (Solution)
17. At what discount rate were 2 documents for $4,000 and $6,000 discounted that are due?
within 2 months and 1 month respectively, they were replaced by another whose current value is $9,040.

Solution
VT= V'1+ V'2replacing the equation (3-29) in V'1+ V’2
Data:
d=? 9.040 = N1(1-d) n1
+ N 2(1-d)
2 n replacing
N14.000 $
9.040 = 4.000 (1-d)2+ 6.000 (1-d)
n12 months
N2 = 6.000 $ 9.040 = 4.000 (1 - 2d + d2) + 6.000 - 6.000 d
n21 month
9.040 = 4.000 - 8.000 d + 4.000 d2+ 6.000 – 6.000 d
VT9.040 $
Sorting
4,000 d2-14,000 d + 960 = 0 / 1000
4 d2-14d + 0.960 = 0
We solve by the quadratic equation:
2
14 14 09.*64*4
d ± −
= 42*
14 13.44 d1 = 3.43 = 343% it doesn't make sense
d ±
= 8 d = 0,07 = 7% mensual (Solución)
2

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