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MATH 10B: Mathematics of Investment: Prepared by

This document provides an overview of promissory notes, including simple interest notes and bank discount notes. It defines a promissory note as a written promise by a borrower to repay a lender. For simple interest notes, the principal, interest rate, and term are used to calculate the interest and maturity value. For bank discount notes, the maturity value is given, and the interest is deducted upfront to determine the proceeds. Examples are provided to demonstrate calculating values for each note type. Discounting promissory notes before maturity is also discussed.

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1K views6 pages

MATH 10B: Mathematics of Investment: Prepared by

This document provides an overview of promissory notes, including simple interest notes and bank discount notes. It defines a promissory note as a written promise by a borrower to repay a lender. For simple interest notes, the principal, interest rate, and term are used to calculate the interest and maturity value. For bank discount notes, the maturity value is given, and the interest is deducted upfront to determine the proceeds. Examples are provided to demonstrate calculating values for each note type. Discounting promissory notes before maturity is also discussed.

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maxene jade
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© © All Rights Reserved
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MATH 10B:

MATHEMATICS
OF INVESTMENT

MODULE 7:
PROMISSORY
NOTES

PREPARED BY:
ROTCH GERTRUDE B. BAGOLBOL
Faculty, Institute of Arts and Sciences
Learning Outcomes:

At the end of the unit, the learners will:


 Identify the use of promissory notes.
 Learn to solve for promissory notes.

Module Overview:

We are done with the first half of the semester, thus, we have learned half of
the topics we need to be knowledgeable of. This unit focuses on learning about
promissory notes and its types.

Preliminary Activity:

As you read through, consider the following questions:


1. What is a promissory note?
2. How is a promissory note used?

Content:

I. PROMISSORY NOTES

Individuals conduct business transactions that require some form of


capitalization. To address their financial requirements, they make loans. They
negotiate with individuals, banks, or other financial institutions to borrow
money given a specified interest or discount rate. However, it is important that
the borrower should give the lender or creditor an assurance that any
financial obligation will be settled during the agreed time. One way of doing
this is by signing a promissory note.

A promissory note is a written promise on the part of the borrower to


pay another person his financial obligation. It includes the agreed interest or
discount rate and term. There are two types of promissory notes. The first
type is the simple interest note. The second is the bank discount note.

II. Simple Interest Note

The simple interest note is a promissory note where the principal, P, is


explicitly written. It is better referred to as the face value of the loan. The total
amount to be repaid on the maturity date is the maturity value, F. Let us look
at this example.

₱100,000 Manila, Philippines June 29, 2008

One hundred twenty days after the above date, the undersigned
promised to pay to the order of Rodolfo Dizon the sum of one hundred
thousand pesos only (₱100,000) with interest at 16% per annum
payable at North East Banking Corporation, Manila.

Signed: Kevin Laserna

Referring to this example,

1
 The maker of the note is Kevin Laserna.
 The payee is Rodolfo Dizon.
 The face value of the simple interest note is ₱100,000.
 The simple interest rate is 16%.
 The term of the simple interest note is 120 days.
 The origin date of the term is June 29, 2008.
 The maturity date of the term is October 27, 2008.

June 1 (30 – 29)


July 31
August 31
September 30
October 27
120 days

 The interest to be paid is ₱5,333.33

I=Prt
120
= 100,000 (.16) ( )
360
= ₱5,333.33

 The maturity value is ₱105,333.33

F=P+I
= 100,000 + 5,333.33
= ₱105,333.33

Example:
A simple interest note for ₱80,000.00 at 16% per annum was signed on April 20,
2008 and due on July 31 on the same year. Find the maturity value.

Solution:

Given: F = ?
r = .16
t = 102 days
P = 80,000

April 10 (30 – 20)


May 31
June 30
July 31
102 days

Therefore,
I=Prt
102
= 80,000(.16)( )
360
= ₱83,626.67

F=P+I
= 80,000 + 3,626.67
= ₱83,626.67

2
The maturity value is ₱83,626.67

III. Bank Discount Note

The bank discount note is another type of promissory note. Oftentimes


used, the maturity value, F, is explicitly written in the note. It is the amount to
be paid by the borrower. The interest is computed on this amount and
deducted in advance. The sum of money received by the maker is called
proceeds, P.

Let us look at this example.


₱150,000 Manila, Philippines March 23, 2008

One hundred fifty days after the above date, for the value
received with interest at 9% per annum discounted to maturity, the
undersigned promises to pay to the order of Manila Finance, the sum of
one hundred fifty thousand pesos only (₱150,000), payable at Manila
Finance.

Signed: Remedios Mutuc

Referring to this example,


 The maker of the note is Remedios Mutuc.
 The payee is Manila Finance.
 The maturity value of the bank discount note is ₱150,000.
 The simple discount rate is 9%.
 The term of the bank discount note is 150 days.
 The origin date of the term is March 23, 2008.
 The maturity date of the term is August 20, 2008.

March 8 (31 – 23)


April 30
May 31
June 30
July 31
August 20
150 days

 The interest to be deducted in advance is ₱5,625.00

I=Fdt
150
= 150,000 (.09) ( )
360
= ₱5,625.00

 The proceeds is ₱144,375.00

P=F–I
= 150,000 – 5,625
= 144,375

Example:

3
A bank discount note for ₱80,000.00 at 8% has a term of 9 months. Find the
proceeds and the interest charged in advance.

Solution:

Given: F = 80,000
r = .08
t = 9 months or .75
P=?
I=?

I=Fdt
= 80,000(.08)(.75)
= 4,800 (interest charged in advance)

P=F-I
= 80,000 – 4,800
= ₱75,200 (proceeds)

IV. Discounting Promissory Notes

Sometimes, cash shortages occur. There are instances wherein there


is a need to discount promissory notes. This happens when the payee of the
note needs money before the specified maturity date.

Example:
A note indicates that after 150 days, Harry has to pay Lemuel ₱20,000 with interest
at 12%. One hundred days after the date of the note, Lemuel sold the note to a bank
at 14% discount. Find the proceeds.

Solution:

Given: P = 20,000
r = .12
t = 150 days
d = .14
Pr = ?

F = P(1 + rt)
150
= 20,000[1+.12( )]
360
= ₱21,000 (maturity value)

Pr = F(1 - dt)
50
= 21,000(1 - .14( )]
360
= ₱20,591.67 (proceeds)

4
Assessment:

I. Simple Interest Note


₱120,000 Camiguin, Philippines June 27, 2008

One hundred twenty days after the above date, the undersigned
promised to pay to the order of Maria Elizares the sum of one hundred
twenty thousand pesos only (₱120,000) with interest at 15% per annum
payable at Mambajao Lending, Philippines .

Signed: Dex Reyes

Identify the following based on the note above:


1. The maker of the note
2. The payee
3. The face value
4. The simple interest
5. The term of the simple interest note
6. The origin date of the term
7. The maturity date of the term
8. The interest to be paid
9. The maturity value

II. Bank Discount Note

1. A bank discount note for ₱100,000 at 8% has a term of 6 months, Find the
proceeds and the interest charged in advance.

Module Summary:
Promissory note is a written promise on the part of the borrower to pay
another person his financial obligation. There are two types of promissory note, the
simple interest note and the bank discount note. Discounting Promissory Notes is
also discussed.

References:

 Young, Felina C., (2010). Mathematics of Investments Made Simple. Rex


Book Store, Inc. Sampaloc, Manila.

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