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Understanding Discount Interest Calculations

Lesson 5 discusses discount interest, which is interest paid in advance when borrowing money. Discount interest is calculated based on three factors: the maturity value or loan amount, the discount interest rate expressed as a percentage, and the term of the loan in years. The formula to calculate discount interest is: Discount Interest = Maturity Value x Discount Rate x Term. The actual amount received by the borrower is called the loan proceed, which is calculated by subtracting the discount interest from the maturity value.

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15 views9 pages

Understanding Discount Interest Calculations

Lesson 5 discusses discount interest, which is interest paid in advance when borrowing money. Discount interest is calculated based on three factors: the maturity value or loan amount, the discount interest rate expressed as a percentage, and the term of the loan in years. The formula to calculate discount interest is: Discount Interest = Maturity Value x Discount Rate x Term. The actual amount received by the borrower is called the loan proceed, which is calculated by subtracting the discount interest from the maturity value.

Uploaded by

Angelica Sulay Balaod
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Lesson 5: Discount Interest

Learning Objectives
At the end of the students should be able to do the
following :

 Define discount interest, and


Calculate the discount interest from given problems
Discount Interest
• Is also an amount paid for borrowing money.
• Is paid on the date the loan is made.
• is paid in advance and is taken from the
amount of the loan that was applied for on the
origin date..
• Thus, under the discount interest agreement , the loan
applied for on or design date would be the amount
due on the maturity date.
• The actual amount received by the borrower on the
origin date is difference between the amount due on
the maturity date the discount interest.
Discount Interest depends on (3) three
factors

1. The maturity value F of the loan , which is also the loan amount applied for on
the origin date.
2. The discount interest rate d, which is expressed in percent , and is to be
computed on F, and
3. The term of the loan t, expressed in years , which is the time between the origin
and maturity.
The formula for discount interest Id given by Id = Fdt

The actual amount received by the borrower on the origin date is called
the loan proceed Lp.

Lp= F - Id or Id = F - Lp
Replacing Lf by Fdt gives Lp= F – Fdt
And then factor F, we obtain Lp= F ( 1 – dt )
The discount interest Id ( also known as simple discount ) is
often referred to as interest charged in advance, which is why
discount interest rate is also called interest rate in advance .

Other related formula are:

F = Id / dt or F = Lp/ ( 1 – dt )
D = Id / Ft or d = ( F – Lp ) / Ft
T =Id / Fd or t = ( F – Lp ) Fd
In problem involving discount interest rates, I should be taken as actual number of
days divided by 360 ( Banker’s Rule ) when given the origin and maturity dates.
For examples:
Lito borrow P10,000 from the Social Security System for a term of 1 year. The
interest charged is 9% discount interest. Determine the discount interest and the
proceed of the Loan that Lito signs.
Solution:
Given : F = P10,000 d = 0.09 t = 1 Year
Find Idand Lp
The discount interest is Id = Fdt = ( P10,000) (0.09) ( 1 ) = P900
The P900 interest is to be deducted in advance from the loan amount . Hence the
proceed is

Lp= F- Id= 10,000 – 900 = P9,100

Or

Lp= F (1 – dt ) = 10,000 [ 1- (0.09) ( 1 ) = P9,100

This means that Lito receives P9,100 on the origin date and he will pay P10,000
on the maturity date.

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