UDC2008: BUSINESS MATHEMATICS
CH 7: PROMISSORY NOTES
Prepared by: Mdm Nisa, UMCCed, 2024 1
Learning Outcomes
By the end of this chapter, you should be able to
explain the meaning of a promissory note
list the main features of a promissory note
compute the face and maturity values of promissory notes
compute bank discounts and the proceeds obtained when a
promissory note is discounted, and
compute the simple interest rate that a bank earns when a
promissory note is discounted.
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7.1 Introduction
• There are many ways a company can raise money for
working capital or expansion. It can issues new share,
borrow from banks, issue bonds or promissory notes.
• Promissory notes or notes in short are usually debt
instruments and are issued on short-term basis.
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7.2 Promissory Notes
• A promissory note is a written promise made by one person or
party to repay a loan or debt on a specified future date to
another person or party.
• A negotiable instrument is a signed document that promises
the bearer a stated sum of money at a future date or on
demand.
• Promissory notes are negotiable documents and can be of two
types, interest bearing notes and non-interest bearing notes.
• For an interest bearing note, the rate of interest is stated on
the note and is usually a simple interest rate.
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7.2 Promissory Notes (Cont.)
• The main features of a promissory note are as follows:
• Maker
The maker (promisor or obligor) is the person that signs the note.
• Payee
The payee (promisee or obligee) is the person to whom the payment is to be
made.
• Date of the note
The date of the note is the date on which the note is made.
• Term of the note
The term of the note is the length of time until the note is due for payment.
• Face value
The face value of the note is the amount stated on the note.
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7.2 Promissory Notes (Cont.)
• 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 any interest that is due.
S = P (1 + rt)
• Maturity date
The maturity date of the note is the date on which the maturity value
is due.
•
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7.2 Promissory Notes (Cont.)
Example 7.1
In the promissory note above,
a) who is the maker of the note?
b) who is the payee of the note?
Calculate the maturity value of the note.
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7.2 Promissory Notes (Cont.)
• Solution
a) The maker is Mat Hassan.
b) The payee is Mohammed Salleh.
c) Maturity value
S = P (1 + rt)
60
= RM2,500 (1 + (0.08 × ))
360
= RM2,533.33
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7.2 Promissory Notes (Cont.)
Example 7.2
A promissory note dated 22 February 2019 reads‘three months
from date, I promise to pay RM1,000.00 with interest at 9% per
annum. Find the
a) maturity date of the note,
b) maturity value of the note.
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7.2 Promissory Notes (Cont.)
Solution
a) Maturity date = 22 February 2019 + 3 months
= 22 May 2019
b) Maturity value, S = P (1 + rt)
3
= 1,000 (1 + (0.09 × ))
12
= RM1,022.50
10
7.2 Promissory Notes (Cont.)
Example 7.3
The maturity value of a sixty-day interest bearing promissory note is
RM450. If the interest rate is 6% per annum, what is the face value of the
note?
Solution
From S = P(1 + rt), we get
60
450 = P(1 + 0.06 × )
360
where P is the face value
P = RM445.54
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7.2 Promissory Notes (Cont.)
Example 7.4
The interest on a ninety-day promissory note is RM46. If the interest rate is
7% per annum, find the face value of the note.
Solution
From I = Prt, we get
90
46 = P × 0.07 ×
360
where P = face value
P = RM2,628.57
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7.3 Bank Discount
• It is common for lenders, such as banks and financial institutions, to
deduct the interest charge in advance for short-term loans.
• Bank discount is the interest in advance.
• The net amount received by the borrower is called the proceeds.
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7.3 Bank Discount (Cont.)
• Bank discount, D, is computed based on the maturity value, S. The formula is as
follows:
D = Sdt
where D = bank discount,
S = amount of maturity value,
d = discount rate,
t = term of discount in years
• The net amount received by the borrower is called the proceeds. The proceeds, P, are
computed as follows:
Bank proceeds = Maturity value – Bank discount
P =S–D
P = S(1 – dt) 14
7.3 Bank Discount (Cont.)
Example 7.5
Sharifah borrows RM8,000 for three months from a lender
who charges a discount rate of 10%. Find the
a) discount,
b) proceeds.
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7.3 Bank Discount (Cont.)
Solution
Here,
S = RM8,000,
d = 10%,
t = 0.25 year.
a) From D = Sdt, we get
Discount = 8,000 × 0.1 × 0.25
= RM200
b) From P = S – D, we get
Proceeds = 8,000 – 200
= RM7,800
Note that Sharifah will have to pay RM8000 at the end of the three months.
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7.3 Bank Discount (Cont.)
Example 7.6
If Tong needs RM4,000 now, how much should he borrow from his bank
1
for 1 year at a 12% bank discount rate?
2
Solution
Here,
P = RM4,000,
d = 12%,
t = 1.5 years
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7.3 Bank Discount (Cont.)
From P = S(1 – dt), we get
4,000 = S(1 – 0.12 × 1.5)
where S = amount borrowed.
4,000
S = 1 − 0.12 1.5
= RM4,878.05
Tong should borrow RM4,878.05 to get RM4,000 as proceeds.
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7.4 Simple Interest Rate Equivalent to Bank
Discount Rate
• An 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.
• Equating the two present values, we get
S(1 + rt)–1 = S(1 – dt)
1
= 1 – dt
1 + rt
• Thus, we get
r
Discount rate, d = 1 + rt
d
Interest rate, r =
1 − dt
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7.4 Simple Interest Rate Equivalent to Bank
Discount Rate (Cont.)
A bank discounts a RM4,000 note due in six months using a bank discount
rate of 12%. Find the equivalent simple interest rate that is charged by the
bank.
Solution
Here, d = 12%, t = 0.5 year
d
From r= , we get
1 − dt
0.12
r=
1 − 0.12 0.5
= 12.77%
The bank charges 12.77% simple interest rate.
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7.4 Simple Interest Rate Equivalent to Bank
Discount Rate (Cont.)
Example 7.10
What discount rate should a lender charge to earn an interest rate of 20% on a
nine-month loan?
Solution
Here, r = 20%,
t = 0.75 year
r
From d = , we get
1 + rt
0.20
d=
1 + 0.20 0.75
= 17.39%
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7.5 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 date the note is discounted is called the discount date.
• The amount received on the date of discounting is called the
proceeds.
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7.5 Discounting Promissory Notes (Cont.)
• To calculate the proceeds of a promissory note:
a) Find the maturity value of the note. For non-interest
bearing notes, it is the face value. If the note is interesting
bearing, then,
Maturity value = P(1 + rt)
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7.5 Discounting Promissory Notes (Cont.)
b) Find the bank discount, D, with the formula D = Sdt
where S = maturity value of the note,
d = bank discount rate, and
t = the discount period or term of discount, which is the number of
days between the discounted date and the maturity date
c) Find the Proceeds = Maturity value – Bank discount
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7.5 Discounting Promissory Notes (Cont.)
Example 7.11
Marina, a businesswoman, receives a promissory note for
RM1,500 with interest at 10% per annum that is due in 60 days.
The note is dated 10 April 2019. The note is discounted on 15
April 2019 at a bank that charges 12% discount. Determine the
a) maturity date
b) maturity value
c) discount period
d) proceeds.
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7.5 Discounting Promissory Notes (Cont.)
Solution
a) Maturity date = 10 April 2019 + 60 days
10 April to 30 April = 20 days
1 May to 31 May = 31 days
1 June to 9 June = 9 days
60 days
Thus, the maturity date is 9 June 2019.
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7.5 Discounting Promissory Notes (Cont.)
b) Maturity value = P(1 + rt)
60
= 1,500(1 + 0.10 × )
360
= RM1,525
c) Discount period = 15 April 2019 to 9 June 2019
= (15 + 31 + 9) days = 55 days
d) From D = Sdt, we get
55
D = 1,525 × 0.12 × 360 = RM27.96
Proceeds = Maturity value – Bank discount
= RM1,525 – RM27.96
= RM1,497.04
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7.5 Discounting Promissory Notes (Cont.)
Example 7.12
On 24 July 2019, Vani discounts the non-interest bearing note as shown
below at a bank that charges a discount rate of 11%. Find the proceeds.
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7.5 Discounting Promissory Notes (Cont.)
Solution
Maturity value = Face value = RM2,600
Bank discount = Sdt
149
= 2,600 × 0.11 ×
360
= RM118.37
Proceeds = Maturity value – Bank discount
= RM2,600 – RM118.37
= RM2,481.63
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7.5 Discounting Promissory Notes (Cont.)
Example 7.13
Tong Sing Auto Company has a note dated 15 December 2019 for RM4,800
with interest at 8% per annum. The term of the note is three months. If the
company discounts the note on 30 January 2020 at a bank that charges a
discount rate of 7%, what are the proceeds?
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7.5 Discounting Promissory Notes (Cont.)
Solution
Maturity value = P(1 + rt)
= 4,800(1 + 0.08 × 123)
= RM4,896
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7.5 Discounting Promissory Notes (Cont.)
Discount period = 30 January 2019 to 15 March 2020
= 45 days
Bank discount = Sdt
45
= 4,896 × 0.07 ×
360
= RM42.84
Proceeds = Maturity value – Bank discount
= RM4,896 – RM42.84
= RM4,853.16
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LIST OF FORMULA FOR TODAY’S LESSON
Promissory Notes
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