LESSON 4

PROMISSORY NOTES
Topic Objective/s:
At the end of this lesson, you must have:

1. Solved real-life problems relating to promissory notes.

Keywords
List the keywords in Lesson 4.

Let’s Look Back!

In the previous lesson, you have learned about Discount. Discount (D) is a deduction
from the maturity amount (F) of an obligation allowed for paying it currently.

The formula is D = Fdt, where:

D = discount
F = amount of maturity
d = discount rate
t = time or term of discount

Suppose a loan of P 3, 500 will be paid with P 3, 750 at the end of one year and 3 months,
what is the simple discount rate?
Given:
P = P3, 500
F = P3, 750
t = 1 ¼ years (one year and 3 months is equivalent to 1 ¼ years)
Solution:
d = D/Ft
= (3, 750 – 3, 500)/ 3, 750 (1 ¼)
= 0.0533 or 5.33 %

Let’s Learn!
A promissory note is a written promise by the drawer to pay a certain amount of
money to the drawee at a certain specified time.

It is also a negotiable instrument which can be sold to the bank or any lending agency
at a specified discount rate. Cashing a note at a bank is called discounting a note. The bank or
the lending agency collects interest in advance, called bank discount.

Features of a promissory note:

1. Date of the note – the date the note was written (Dn)
2. Maturity date – the date the note is due (Md)
3. Date of discounting – the date the note is to be discounted (Dd)
4. Face value – stated amount in the promissory note or present value (P)
5. Maturity value – the sum of the face value and the interest or the final amount (F)
6. Term of the note – the difference between the date of the note and its maturity date
(tn)
7. Term of discount – the difference between the maturity date and the date of
discounting. If this is given in days, the banker’s rule is used (td).
8. Proceeds – remaining amount after the bank discount is deducted from the maturity
value.

Formulas:
I = Pr (Days/360) or I = Prtn
F=P+I
Md = Dn + tn
td = Md – Dd
D = Fd (Days/ 360) or D = Fdtd
Proceeds = F – D or Proceeds = F [ 1 – d (days / 360) ]
= f (1- dtd)
Where:
r = rate of simple interest
d = rate of simple discount
tn = term of the note in years
td = term of discount in years
 I = amount of simple interest
D = amount of simple discount
P = principal or face value of the note
F = final amount or maturity value of the note
Dd = date of discount
tn = term of the note
Dn = date of the note or initial date
Md = maturity date or final date
Pr = amount of proceeds, amount payable at the discount date

Example of a promissory note

P12, 400 San Isidro, Tomas Oppus, Southern Leyte January 5, 2021
Two hundred ten days after the above date, I promise to pay to the order of Mrs. Lucia Tan,
Twelve thousand four hundred pesos, with interest at 9 ½ % simple interest payable at ABC Bank
of San Isidro, Tomas Oppus, Southern Leyte.
Signed: Mercy Reyes

The above note has the following features:

1. The face value is P12, 400.
2. The date of the note, January 5, 2021, is the date on which it was made and from which
interest is computed.
3. The term of the note is 210 days.
4. The payee of the note is Mrs. Lucia Tan.
5. The maker of the note is Mercy Reyes.
6. The interest rate of the note is 9 ½ % simple interest.

The maturity of the note will be 210 days after January 5, 2021.

On the maturity date, the principal of P12,400 and the simple interest at 9 ½ % for 210 days
must be paid. The total of principal and interest is called the maturity value of the note.

Example 1
A note for P12, 400 dated January 5, 2021, with interest at 9.5 % is due in 210 days. The
promissory note is to be discounted on May 16, 2021 at a discount rate of 9%. Compute for the
following:
a. Simple interest (I)
b. Maturity value of the note (F)
c. Maturity date (Md)
d. Term of discount (td)
e. Simple discount (D)
f. Proceeds (Pr)
Given:
P = P12, 400
Dn = January 5, 2021
r = 9.5 % = .095
tn = 210 days
Dd = May 16, 2021
d= 9% = .09

Solution:
a. Simple interest
I = P r tn
= (12, 400) (.095) (210/360)
= P687.17

b. Maturity value of the note

F=P+I
= 12, 400 + 687.17
= P 13, 087.17

c. Maturity Date
Md = Dn + tn
= January 5, 2021 + 210 days
= 215 days August 3, 2021

d. Term of discount
Td = Md – Dd
= August 3, 2021 – May 16, 2021
= 215 days – 136 days
= 79 days
e. Simple discount
D = (F) (d) (td/360)
= (13,087.17) (.09) (79/360)
= P258.47

f. Proceeds
Pr = F – D
= 13, 087.17 – 258.47
= P12, 828.70
Example 2

Mr. Maniningil has a five-month note of P 15, 900 dated February 6, 2020 bearing interest at
8.6%. If he sells the note on April 10, 2020 at a bank discount rate of 8%, determine the
proceeds.

Given:
P = P15,900
Dn = February 6, 2020, tn = 5 months
r = 8.6% = .086
Dd = April 10, 2020
d = 8% = .08

Solution:

Pr = F-D or Pr = Proceeds = F [ 1 – d (days / 360) ]

So, we have to solve for the maturity value of the note (F) first.

F = P [ 1 + r (tn/12)]
= 15,900 [ 1 + .086 (5/12)]
= P 16,469.75

After solving for the maturity value of the note, let us solve for the maturity date (Md)

Md = Dn + tn
= February 6, 2020 + 5 months
= July 6, 2020

Now, we can solve for the term of discount in years (td)

td = Md – Dd
= July 6, 2020 – April 10, 2020
= 187 – 100
= 87 days

We can finally solve for the proceeds.

Pr = F [ 1 – d (td / 360) ]
= 16, 469.75 [ 1 – .08 (87 / 360) ]
= P 16, 151.33
 Example 3

On July 23, 2020, Mrs. Reyes draws a note promising to pay Mr. Cruz P20,000 together with
interest from date at 7%, three months later. A banker discounts this note for Mr. Cruz at 9%
on August 29, 2020.

Find:
a. the maturity date and maturity value
b. the term of discount in actual days
c. the amount of discount
d. the proceeds received by Mr. Cruz on August 29.
Given:

P = 20, 000
Dn = July 23, 2020 tn = 3 months
Dd = August 29, 2020
r = 7% = .07
d = 9% = .09

Solution:

a. Md = Dn + tn
= July 23, 2020 + 3 months
= October 23, 2020
b. td = Md – Dd
= October 23, 2020 – August 29, 2020
= 55 days

Before we can solve for D, we first have to compute for F.

F=P+I
= 20,000 (20,000 x .07 x 3/12)
= 20,000 + 350
= P20, 350

c. D = (F) (d) (td/360)

= (20,350) (.09) (55/360)
= P279.81

d. Pr =F–D
= 20, 350 – 279.81
= P20, 070.19
Let’s Try This!
Solve the following problems. Show your solution.
1. A 150-day note for P 12,500 dated June 3, 2020 with interest at 11% is discounted
on September 3, 2020 at 8.5% simple discount. Find the:
a. Maturity date
b. Maturity value
c. Term of discount
d. Discount
e. Proceeds

2. A note for P9,000 dated August 12, 2020 is due on October 20, 2020 with simple
interest at 9%. If the note is discounted on August 20, 2020 at 13%, how much
should the proceeds be?
 Let’s Do this!
Read and understand the following word problems. Solve for what is asked. Show your
solutions.

1. LG and Associates received a note for P200,000 dated September 20, 2020. The note is
due in 6 months at 8.25%. If the corporation discounts the note on January 30, 2021 at a
bank charging a discount rate of 8%, how much will be the proceeds?

2. A note of P 35,000 matures in 6 months with interest at 7.75%. The note is discounted 4
months before maturity date at a discount rate of 6.5%. How much is the proceeds?