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Chapter 7 - Promissory Notes

Promissory notes are debt instruments used when one party lends money to another. They contain key terms such as the borrower (maker), lender (payee), amount borrowed (face value), interest rate, maturity date when the full amount is due (maturity value). An example note is presented for a 3 month term where the borrower must pay back RM1000 with a 9% annual interest rate, resulting in a maturity value of RM1022.50. Bank discount is similar to simple interest but based on the final maturity value, where the borrower receives proceeds upfront that are less than the maturity value due to interest charged in advance. Equivalence formulas show discount and interest rates that produce the same present value

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Izny Kamaliyah
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189 views7 pages

Chapter 7 - Promissory Notes

Promissory notes are debt instruments used when one party lends money to another. They contain key terms such as the borrower (maker), lender (payee), amount borrowed (face value), interest rate, maturity date when the full amount is due (maturity value). An example note is presented for a 3 month term where the borrower must pay back RM1000 with a 9% annual interest rate, resulting in a maturity value of RM1022.50. Bank discount is similar to simple interest but based on the final maturity value, where the borrower receives proceeds upfront that are less than the maturity value due to interest charged in advance. Equivalence formulas show discount and interest rates that produce the same present value

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Izny Kamaliyah
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PROMISSORY NOTES

DEFINITION OF PROMISSORY NOTES


> Promissory notes are debt instruments

> Can be used by anyone who wants to borrow money from or lend money money to another person

> Made by the borrower

MAIN FEATURES OF PROMISSORY NOTES


MAKER ( BORROWER )
FACE VALUE
> The person that signs the note.
> The amount stated on the note.

PAYEE ( LENDER )
MATURITY VALUE
> The person who lends the money.
> The total sum of money which the payee (lender)

will receive on the maturity date.


DATE OF THE NOTE

> The date on which the note is made.


MATURITY DATE

> The date on which the maturity value is due.


TERM OF THE NOTE

> The length of time until the note is due for payment.
EXAMPLE

A promissory note dated 22 February 2015 reads 'three months from the date, I promise

to pay RM1000 with interest at 9% per annum'. Find the maturity value of the note.

t = 3/12 t = 3/12
P = RM1000 P = RM1000
r = 0.09 r = 0.09
S=? OR S=?

S = P(1+rt) S=P+I
S = RM1000 [ 1 + (0.09 X 3/12) ] S = RM1000 + [ RM1000 X 0.09 X 3/12 ]
S = RM1022.50 S = RM1022.50
> This charge is called interest in advance
> The net amount received by the borrower is called the proceeds

Eg : Borrow = RM1,000

Interest in advance = RM120

Proceeds = RM880

Need to pay back = RM1,000

> Bank discount = simple interest ; except that it is based on the final
BANK amount (to be paid back) or maturity value.

DISCOUNT BANK DISCOUNT FORMULA

D = Sdt P = S(1-dt)
D = bank discount P = proceeds
S = amount of maturity value S = amount of maturity value
d = discount rate d = discount rate
t = term of discount in years t = term of discount in years
EXAMPLE

If Irdina need RM4,000 now, how much should she borrows from her bank for 2 years at a

12% bank discount rate?

t=2
P = RM4,000
d = 0.12
S=?

P = S(1-dt)
RM4,000 = S [ 1-(0.12X2) ]
RM4,000 = 0.76S
S = RM5,263.16

Thus, Irdina should borrow RM5,263.16 to get RM4,000 as proceeds.


SIMPLE INTEREST RATE EQUIVALENT TO BANK
DISCOUNT RATE

An interest rate, r% and a discount BANK DISCOUNT RATE SIMPLE INTEREST RATE
rate, d% are said to be equivalent

if the two rates give the same


r d

present value for an amount due in d = r =


the future.
1 + rt 1 - dt
THANK YOU HEHE
FEEL FREE TO ASK ME!

Prepared by Raja Nur Izny Kamaliyah

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