CHAPTER XXIX DISCOUNTING NOTES AND OTHER COMMERCIAL PAPER 247 Borrowing from a Bank. Banks prefer to have the borrower pay interest in advance. The interest may be paid in cash, or the bank may subtract it from the face of the note, giving the borrower the difference, which is called the proceeds. If you gave a bank the following note: $100.00 Ninety days after date, CHICAGO, ILL., March, 2, 1922. to the order of the Bowen National Bank One Hundred Dollars. I promise to pay Your Signature the bank would deduct ninety days' interest, $1.50, and you would receive the proceeds, $98.50. NOTE. There is no promise to pay interest, because the interest is prepaid. Banks may charge any rate they choose, within the limits set by the state law. In this text, when no rate is mentioned use 6%. The above illustration shows the method of discounting a note. 248. Terms Used in Bank Discount. The following terms are used frequently, and you should become familiar with them: Maturity means the date on which the note is due. The value of the note is the amount due at maturity. If the note draws interest, the value is the sum of the principal and the interest. Otherwise, the value is the face of the note. The discount period is the exact number of days between the date of discounting the paper and its maturity. The bank discount is the simple interest on the value for the discount period. The difference between the value and the bank discount is called the proceeds. If the proceeds of a discounted note exceed the face, the excess is interest; if the proceeds are less than the face, the difference is discount. Oral Work In the illustration on the previous page what are each of the following: The value? The maturity? The bank discount? The discount period? 249. To find the bank discount and the proceeds. To compute the bank discount, compute the simple interest on the value of the note for the discount period. To find the proceeds, subtract the bank discount from the value of the note. Written Work How much would you receive from the bank if you discounted the following notes? 1. A note for $500, without interest, due in 30 days, discounted at 6%. 2. A note for $725, without interest, due in two months, discounted at 6%. 3. A note for $85.50, without interest, due in 90 days, discounted at 7%. 4. The following blank shows the value of several notes and the periods for which they were discounted. Compute the bank discount at 6%, and find the proceeds. NOTE DUE IN VALUE $87.00 $265.00 $962.50 $1,000.00 $275.00 $765.00 $35.00 250. Discounting the Paper of Other Persons. If you have a note signed by some person of good financial standing, you can borrow money on it by discounting it in the same way that you would discount a note made by yourself. Suppose John Doe had given you the following note: you transfer the note to the bank. Moreover you promise to pay the bank $500 on April 18, in case Doe fails to do so. The bank will loan you $500 minus the discount. When you discounted your own note (in the exercise just given), you did so on the same day that the note was made. The discount period and the time of the note were therefore the same. But you may keep the notes of other people some time before discounting them. The bank will charge you interest from the day you discount a note until it is due. Thus, if you had not discounted the above note until March 6, the bank would have charged you interest for the number of days from March 6 to April 18, the date of maturity. How many days in this discount period? What would be the discount period if you discounted the note January 24? February 16? March 21? 251. To find the discount period. Find the maturity of the note. Find the exact number of days between the date of discount and the date of maturity. 252. To find the maturity. Notes due a certain number of months after date fall due on the same day of the month as the day on which they were made, with the following exceptions: Notes made on the 31st, maturing after a specified number of months, falling due in a month having only 30 days, mature on the 30th. Notes made on the 28th, 29th, 30th, or 31st, maturing after a specified number of months, falling due in February, mature on the last day of February. Notes due a certain number of days after date, mature after the exact number of days has elapsed. Since February has only 28 days, the 30 days of the note will be divided as follows: b.. March 18 12 February days (after the 16th) 18 March days 30 days April 17 March has 31 days; 13 left after the 18th; the remaining 17 of the 30 days must be in April. c. April 17 30 days May 17 April has 30 days; 13 left after the 17th; the remaining 17 of the 30 days will be in May. From these illustrations, the following should be clear: To find the maturity: Change the days to months; (30 days = 1 month). Assume that the note will mature on the same day of some following month. Correct this result by subtracting 1 day for each month of 31 days through which the note runs; and by adding 2 days if the note runs through February. (In case of leap year, add 1 day.) The following table provides a convenient method for indicating the months for which corrections are to be made. Problems. 1. Find the maturity of a note dated May 16, 1922, due in 4 months. SOLUTION. May is the fifth month. Add 4 months. The note will be due in the ninth month, which by the table is September. Maturity, September 16. 2. Find the maturity of a note of the same date, due in 120 days. SOLUTION. Call 120 days 4 months. May is the fifth month. The note is due in the ninth month, shown by the table to be September. Call the maturity September 16. Correct as follows: 3. Find the maturity of a note dated December 19, 1921, due in 150 days. SOLUTION. Call 150 days 5 months. December is the twelfth month. which, by the table, is May. Call the maturity May 19, 1922. The note is due in the seventeenth month, |