MAT112-TOPIC 3:PROMISSORY NOTE

A promissory note is a legal instrument(more particularly, a financial instrument), in which one party (themaker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. If the promissory note is unconditional and readily salable, it is called a negotiable instrument.^[1]



A promissory note is written documentation of a debt

 The note itself has the repayment terms, including total owed, interest rate and payment due date or repayment schedule. Promissory notes are usually used for debts not backed by the borrower's property, such as personal loans, and sometimes by investors lending money to a business. If you have a promissory note, you'll need to do some math to figure out the owed interest.

Interest is usually charged on the money as a cost of borrowing the money. The face value of a promissory note is the original amount of money that is borrowed. The face value is also referred to as theprincipal. The maturity value (MV) of a promissory note is the amount of money that is paid to the lender at the end of the term of the loan, usually the face value or principal plus the interest.
Sometimes a promissory note can be noninterest-bearing. Such notes are used under special circumstances and for a short period of time. For example, a noninterest-bearing promissory note might be used between relatives. When a loan is secured by a noninterest-bearing promissory note, the maturity value is the same as the face value.

There are two types of interest-bearing promissory notes: the simple interest note and the simple discount note. A simple interest note requires the borrower to pay back the maturity value which is the face value plus interest. The simple discount note has the loan interest deducted in advance. This means that the face value is equal to the maturity value and the borrower receives theproceeds of the loan. The proceeds of a loan or promissory note refers to the amount of money that the borrower receives. The bank discount is the interest that the bank deducts in advance from the face value of the note.

SOME PROBLEMS (FROM WEB)

How much interest will be charged on a $30,000 face value, 90-day note that bears interest at 9 percent a year?

			A)	$675.
			B)	$1,275.
			C)	$1,800.
			D)	$2,700.

A 30-day note dated October 15, would be due on November

			A)	14.
			B)	15.
			C)	16.
			D)	17.

A one-month note dated October 15, would be due on November

			A)	14.
			B)	15.
			C)	16.
			D)	17.

The maturity value of a 90-day note for $4,000 that bears interest at 10 percent a year is

			A)	$4,400.
			B)	$4,100.
			C)	$4,000.
			D)	$3,900.

The proceeds of a $20,000 non-interest- bearing simple discount 13 percent, 90 day note is:

			A)	$20,000
			B)	$19,350
			C)	$20,650
			D)	$19,530
			E)	None of the above

A $25,000, 15 percent, 80-day note, dated November 5, is discounted at National Bank on January 5. The discount period is:

			A)	80 days
			B)	19 days
			C)	61 days
			D)	91 days
			E)	None of the above

Ryan discounts an 80-day note for $15,000 at 12 percent. The bank discount is: (Assume ordinary interest)

			A)	$14,600
			B)	$15,400
			C)	$400
			D)	$15,000
			E)	None of the above

Jay discounts a 100-day note for $25,000 at 13 percent. The effective rate of interest to the nearest hundredth percent is:

			A)	13.48 percent
			B)	13.49 percent
			C)	13.02 percent
			D)	13.03 percent
			E)	None of the above

http://highered.mheducation.com/