Example 7 Discounting a Note at a Bank

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  • #1676351
    shawnl112
    Spectator

    Example 7 Discounting a Note at a Bank

    Facts: Jordan Corporation has a $40,000, 90-days note from a customer dated September 30, Year 3, due December 30, Year 3, and bearing interest at 12%.

    On October 30, Year 3 (30 days after issue), Jordan Corporation takes the note to its bank, which is wiling to discount it at a 15% rate. The note was paid by Jordan’s customer at maturity on December 30, Year 3 (60 days later).

    Required: Compute the amount to be paid by the bank for the note. Determine the amount that Jordan Corporation should report as net interest income from the note.

    2. Calculate the bank discount on the payoff value at maturity, as follows:

    15% discount * 60/360 days * $41,200 = $1,030

    Please let me know why do we use the maturity value 41,200?

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  • #1676357
    scattershot
    Participant

    40,000 note at 12% earns $4800 of interest annually, but this is only a 90 day note.

    4800 / 12 = $400/mo

    400 * 3 = 1200 of interest, added to the 40,000 balance of the note = 41,200

    FAR 12/5/2017 -- 90

    REG 1/19/18 -- 81

    AUD 2/13/18

    BEC 3/9/18

    #1676423
    shawnl112
    Spectator

    Thank you! But why does the bank use the maturity value 41,200 to calculate the bank discount on the payoff instead of using the principal value 40,000?

    My question is why doesn't the bank use 40,000 * 15% * 60/360 instead?

    #1676545
    scattershot
    Participant

    maturity value is everything you'd get when the note is due — the 40,000 face of the note plus all interest accrued.

    your calculation doesn't include the interest, only the principal.

    FAR 12/5/2017 -- 90

    REG 1/19/18 -- 81

    AUD 2/13/18

    BEC 3/9/18

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