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