Mathematics for Management

Chapter 7: Promissory Notes

by
Nor Alisa Mohd Damanhuri and Farahanim Misni
Faculty of Industrial Sciences & Technology

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Content:

7.0 Introduction
7.1 Type of Promissory Notes
7.2 Maturity Value
7.3 Bank Discount & Discounting Notes
7.4 Simple Interest Equivalent to Bank
Bank Discount Rate

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Expected Outcome:

Upon the completion of this course, students will have the

ability to:

1. Identify the types of promissory notes

2. Obtain the maturity value, bank discount and proceed when
the note was discounted
3. Calculate the simple interest equivalent to bank discount
rate by using the formula

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Type of Promissory Notes
Promissory notes can be of two types:

Interest Bearing Note Non-Interest Bearing Note

The rate of interest is stated on the The rate of interest is not stated
note and is usually simple interest on the note.
rate.

The main features of a note usually include the:

• Face Value/Principal amount : the amount stated on the note
• Interest rate if any
• The date : the date on which the note is made
• Terms or repayment : the length of time until the note is due for
payment
• Maturity date : the date on which the maturity value is due
• Payee : the person to whom the payment is to be made
Mathematics for Management
• Maker : the person that signs the note by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 PROMISSORY NOTE
Example of an Interest Bearing Note:

RM 2,900.00 January 1, 2017

Ninety Days AFTER DATE I PROMISE TO PAY TO

THE ORDER OF Oasis Bank

Two Thousand Nine Hundred and Zero Cent

PAYABLE AT Oasis Bank

WITH INTEREST AT 7% per Annum from Date

No. 2307 Due April 1, 2017 Sofia Nadielle

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 PROMISSORY NOTE
Example of a Non-Interest Bearing Note:

RM 2,900.00 January 1, 2017

Ninety Days AFTER DATE I PROMISE TO PAY TO

THE ORDER OF Oasis Bank

Two Thousand Nine Hundred and Zero Cent

PAYABLE AT Oasis Bank

No. 2307 Due April 1, 2017 Sofia Nadielle

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Example:

RM10,000 October 2, 2017

Six months after date, Good Wealth Inc. promises to pay to C. K. Company plus interest

at the rate of 5% per annum

Due: April 2, 2018 Good Wealth Inc.

State the main features of the note based on the above promissory note.

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Solution:

• Face Value/Principal amount: RM10, 000

• Interest rate : 5%
• The date : 2 October 2017
• Terms or repayment : 6 months
• Maturity date : 2 April 2018
• Payee : C.K. Company
• Maker : Good Wealth Inc.

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Maturity Value
What is maturity value?
• The total sum of money which the payee will receive on the maturity
date
Formula Maturity Value:
Interest bearing notes:
Maturity value, S = Face value + Interest
=P+I
= P + Prt
= P(1+rt)

Non-Interest bearing notes:

Maturity value, S = Face value
=P Mathematics for Management
by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Example:

Peter has two different notes and both have a face value of
RM5000 for 60 days. The first note has a simple interest rate
of 8%, while the second note has a discount rate of 7%. What
is the maturity value for each note?

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
Solution:

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Exercises:

• A promissory note dated 23 October 2015 reads ‘Seven

months from date, I promise to pay RM4000 with interest at
6% per annum’. Find
(i) the maturity date
(ii) the maturity value

• The maturity value for 90 days promissory note is RM450 that

bears interest at 8% per annum. What is the face value for this
interest bearing note?

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Bank Discount &
Discounting Notes
What is bank discount?
• The interest charge from a bank for a short term loans.
• Bank discount computed based on the maturity value (final
amount)
What is discounting notes?
• Selling the notes to the bank before its maturity date

Why discounting notes?

• The holder needs a cash before its maturity date

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Formula Bank Discount

D = Sdt
where
S: the simple amount/maturity value
d: discount rate (%)
t: term of discount in years

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Proceed
If the note was discounted:
• the date of the note is discounting date
• the amount received on the date of discounting is called the
proceeds.
• The terms of discount starting from the note was discounted
until the maturity date.
Proceeds = Maturity Value – Bank Discount
=S–D
= S – Sdt
= S(1-dt)
Mathematics for Management
by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Example:

On 2 April 2016, Sharifah borrowed an amount of

RM 8000 at 2% interest rate for three months. The
discount rate charged by the lender is 10%. Find the
bank discount if the note was discounted on 2 May
2012.

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
SOLUTION:

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Exercises:

• If Tong will receive RM4000, 30 days before its maturity date, calculate the
amount of maturity value at 12% bank discount?

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
Simple Interest Equivalent to Bank Discount

• An interest rate, r% and discount rate d% are said to be equivalent if the

two rates give the same present value for an amount due in the future.
Thus,
Calculate d% given that r%

r
d
1  rt

Calculate r% given that d%

d
r
1  dt
Mathematics for Management
by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Example:

A note of RM 4000 will due in six months. A bank discount rate of 12% is
applied to this note. Find the equivalent simple interest rate that is
charged by the bank.

Exercise: What discount rate should a lender charge to earn an interest

rate of 20% on a 9 months loan?
Mathematics for Management
by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 THE END
~ THANK YOU~

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440
 Author Information

noralisa@ump.edu.my
farahanim@ump.edu.my

Mathematics for Management

by Nor Alisa Mohd Damanhuri
http://ocw.ump.edu.my/course/view.php?id=440