PROMISSORY NOTE
This is a promise note written and signed by a debtor or maker to pay amount of money on demand basis or fixed in an agreement dates, may it be by the bearer or to the order of designated person.
Definitions related to promissory note:
1. Face Value(FV) = Borrowed amount.
2. Date of Note(Dn) = The date when the note was written.
3. Maturity Date(Md) = Promised date of payment of the note.
4. Interest Rate (r) = Simple interest rate.
5. Lender/Payee = The person to whom payment is due.
6. Maker/Debtor = The one who borrowed.
Illustration of a promissory note:
Discounting or selling the promissory note:
This is when the holder of the note find that he is in need of cash before the maturity date, he is authorized to sell this note to anyone or to the bank.
The maturity value is the amount generated after the given term. This is when the Face Value and Interest is added.
Legends used in Promissory Note:
FV= Face value
MV=Maturity Value
I= Interest
Tn = Term of the note
r = Interest rate of the note
Dn = Date of the note
Dd = Discounting Date
Md = Maturity Date
td = Term of Discount
Bd = Bank Discount
Pr = Proceeds
Formula used:
I = FV (r)(tn)
MV = FV + I = FV [1+(r)(tn)]
FV = MV - I
Md = Dn + tn
td = Md - Dd
Bd = MV(d)(td)
Pr = MV - Bd = MV [1 - d(td)]
Example problem:
1. John has a note for $ 20,000 dated February 06, 2000. The note is due in 110 days with interest at 12%. If John sells the note on June 06 same year at the bank charging a discount rate of 10%. Find the following required:
a. I
b. MV
c. Md
d. td
e. Bd
f. Pr
Given:
FV = $ 20,000
Dn = February 06, 2000
tn = 110 days = 110/360
r = 12% = 0.12
d = 10% = 0.10
Dd = June 06, 2000
Solution for problem (a):
I = FV (r)(tn)
= $ 20,000 (0.12)(110/360)
= $ 733.33 answer
Solution for problem (b):
MV = FV + I
= $ 20,000 + $ 733.33
= $ 20, 733.33 answer
Solution for problem (c):
Md = Dn + tn
= February 06, 2000 = 37 days + 110 days = 147 days = May 27, 2000 answer
(Now try to continue solving for problem d, e f:)
PROMISSORYNOTE
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