Business Mathematics Brief 12th Edition by Stanley Salzman ,Gary Clendenen, Charles Miller

Exercise 112

Explain the main differences between simple interest notes and simple discount notes. (See Objective.)
OBJECTIVEDefine the basic terms used with simple discount notes. As we saw in Section , simple interest notes involve principal (face value or loan amount), interest rate, time, interest, and maturity value. Simple discount notes involve proceeds ( loan amount ) , discount rate, time, bank discount (interest), and face value (or maturity value ). Face value in a simple interest note is the amount loaned to the borrower, but it is the maturity value in a simple discount note. Simple discount notes are also called interest-in-advance notes , since interest is subtracted before funds are given to the borrower. A basic difference between the two types of notes is that simple interest is calculated based on principal, whereas simple discount is calculated based on maturity value, as shown in the table. College students sometimes borrow money from the government using Stafford loans , which are simple discount notes.