Bank Discount Calculator (Discounting a Promissory Note)

How it works

Maturity value MV = face × (1 + note rate × term ÷ basis) · discount period t = term − days held · bank discount D = MV × discount rate × t ÷ basis · proceeds = MV − D · effective rate = D ÷ proceeds × basis ÷ t

When a business holds a customer’s promissory note (or a bill of exchange) and needs cash before it matures, a bank can buy it at a discount. The bank first works out what the note will pay at maturity, then deducts its discount — the discount rate applied to the maturity value for the days left — and pays the rest as proceeds. Because the discount is taken on the larger maturity value and in advance, the true interest rate on the money received is higher than the quoted discount rate. Business-math texts and most banks use a 360-day year (banker’s rule).

Worked example

A 10,000 note at 8% for 120 days has a maturity value of 10,000 × (1 + 0.08 × 120 ÷ 360) = 10,266.67. Discounted at a bank 30 days after issue, 90 days remain; at a 10% discount rate the bank keeps 10,266.67 × 0.10 × 90 ÷ 360 = 256.67, so the proceeds are 10,010.00. The true rate on the money received is 256.67 ÷ 10,010 × 360 ÷ 90 = 10.26%.

Sources: Wikipedia — Discounting (bank discount) · Investopedia — Bank discount rate (discount yield)

Frequently asked questions