Notes & discounting · Key concepts
Cards
01Who is the maker of a promissory note?
The borrower who signs the promise to pay
The maker issues the note and owes the promised payment.
Slater, Ch. 17, pp. 45002Who is the payee of a promissory note?
The party to whom payment is promised
The original payee extends credit and is entitled to receive payment under the note.
Slater, Ch. 17, pp. 45003What does the term of a note describe?
The length of time until it is due
The term measures the note's duration from issue to maturity.
Slater, Ch. 17, pp. 45004What is the maturity date?
The date the note is due
The maturity date is when the promised payment must be made.
Slater, Ch. 17, pp. 45005For a simple interest-bearing note, what is its maturity value?
Face value plus interest
Interest is added to the face value for the borrower's final payment.
Slater, Ch. 17, pp. 450-45106For a simple discount note, when is the bank discount withheld?
At the start, before proceeds are paid
The charge is deducted in advance, so cash received is below face value.
Slater, Ch. 17, pp. 451-45207Which formula calculates bank discount?
B = MDT
Use maturity value M, bank discount rate D, and time T in years.
Slater, Ch. 17, pp. 45108What are proceeds of a simple discount note?
Cash received after bank discount is deducted
Proceeds are the usable funds received: Pr = M - B.
Slater, Ch. 17, pp. 451-45209For a simple discount note issued at a positive discount, which is largest?
Maturity value
Maturity value equals proceeds plus the positive bank discount.
Slater, Ch. 17, pp. 451-45210What is repaid at maturity on a simple discount note?
Its face value
The face value already represents the amount promised at maturity.
Slater, Ch. 17, pp. 451-45211Why can a simple discount note cost interest even if called non-interest-bearing?
Its interest charge can be deducted in advance
The terminology does not mean zero borrowing cost when a bank discount is withheld.
Slater, Ch. 17, pp. 45112Which denominator is used for the chapter's annualized effective rate on a discount note?
Proceeds multiplied by time in years
The effective cost is measured against usable cash received, not the larger amount repaid.
Slater, Ch. 17, pp. 451-45313For a positive discount with positive proceeds, how does the effective rate compare with the stated discount rate?
It is higher
The same charge is spread over a smaller proceeds base, so the effective rate is higher.
Slater, Ch. 17, pp. 451-45214For equal face values, rates, and terms, how do a simple-interest note's interest and a discount note's bank discount compare?
They are equal dollar charges
Both charges multiply the same face amount, rate, and time, although cash received and repaid differ.
Slater, Ch. 17, pp. 451-45215For equal face values, rates, and terms, which note initially provides more usable cash?
The simple-interest note
The simple-interest borrower receives face value; the discount borrower receives face value less discount.
Slater, Ch. 17, pp. 451-45216Which formula gives proceeds directly from maturity value?
Pr = M(1 - DT)
Factor M out of M - MDT to obtain proceeds.
Slater, Ch. 17, pp. 45617Which formula finds the face value needed for desired proceeds?
M = Pr / (1 - DT)
Solve Pr = M(1 - DT) for M; the needed face value exceeds desired proceeds for positive discount.
Slater, Ch. 17, pp. 45718What must be true of 1 - DT for a standard discount note to provide positive proceeds?
It must be positive
Positive M multiplied by a positive factor is required for positive proceeds.
Slater, Ch. 17, pp. 456-45719Which formula finds the bank discount rate from B, M, and T?
D = B / (MT)
Rearrange B = MDT by dividing by MT.
Slater, Ch. 17, pp. 45620Which formula finds the discount note's time in years?
T = B / (MD)
Divide bank discount by maturity value times the annual discount rate.
Slater, Ch. 17, pp. 45721Which formula finds simple-interest principal from maturity value?
P = M / (1 + RT)
A simple-interest maturity value equals P(1 + RT), so its growth factor is in the denominator.
Slater, Ch. 17, pp. 454-45522Which quantity equals the interest on a simple-interest note when M and P are known?
M - P
Maturity value contains both principal and interest.
Slater, Ch. 17, pp. 45523What does a balloon payment mean in the chapter's one-payment note examples?
A single payment settling the note at maturity
The examples use one final payment that contains the amount needed to settle the note.
Slater, Ch. 17, pp. 45424In the textbook model, how does a Treasury bill bought at a discount generate a return?
It is redeemed for more than its purchase price
The discount is the difference between the purchase price and the amount received at maturity.
Slater, Ch. 17, pp. 452-45325For the chapter's 13-week Treasury-bill example, what fraction of a year is used?
13/52
The example measures a term stated in weeks using weeks divided by 52; this set explicitly labels that convention.
Slater, Ch. 17, pp. 45326For a Treasury bill bought at a discount, which amount is the investor's initial outlay?
The purchase price, or proceeds
The investor pays the discounted price and later receives face value.
Slater, Ch. 17, pp. 452-45327What does it mean to discount an existing note?
Sell it before maturity for cash
The payee exchanges the future payment claim for current proceeds from a bank.
Slater, Ch. 17, pp. 45828Which amount is used as the bank's discount base when an interest-bearing note is sold?
The original note's maturity value
First calculate the complete maturity value; the bank discounts the payment it will collect.
Slater, Ch. 17, pp. 458-45929What is the discount period for a note sold before maturity?
Time from the sale date to maturity
The bank's charge covers the remaining waiting time until the note comes due.
Slater, Ch. 17, pp. 458-46030What is the first step in discounting an interest-bearing note?
Find the original note's interest and maturity value
The bank's charge must be based on the complete amount due at maturity.
Slater, Ch. 17, pp. 45831Which rate is used to calculate the original note's maturity value?
The original simple interest rate
The maker's original promise determines the interest added to the note's principal.
Slater, Ch. 17, pp. 458-45932Which rate is used to calculate the bank's charge when buying the note?
The bank discount rate
The bank applies its own discount rate to maturity value for the remaining term.
Slater, Ch. 17, pp. 458-45933After a note is discounted, how is the seller's cash receipt calculated?
Maturity value minus bank discount
The bank retains its charge and pays the rest to the seller.
Slater, Ch. 17, pp. 458-45934What is a contingent liability in the chapter's discounting arrangement?
A potential duty of the seller to pay if the maker defaults
The arrangement described leaves the seller potentially responsible if the maker does not pay.
Slater, Ch. 17, pp. 45835If an existing non-interest-bearing note is sold to a bank, what is its maturity value?
Its face value
No original interest is added, although the bank may still deduct a discount when purchasing it.
Slater, Ch. 17, pp. 46036With M and D fixed and positive, what happens to proceeds if the discount period gets longer?
Proceeds decrease
B = MDT increases with time, so M - B decreases.
Slater, Ch. 17, pp. 451, 45637With M and T fixed and positive, what happens to proceeds if the bank discount rate rises?
Proceeds decrease
A higher discount rate increases the bank's deduction.
Slater, Ch. 17, pp. 451, 45638Why can a seller's proceeds from an interest-bearing note exceed the original principal?
Original interest can exceed the bank's discount
Proceeds - principal equals original interest minus bank discount.
Slater, Ch. 17, pp. 458-45939In a positive-rate simple-interest note with no fees, how does the annualized effective rate compare with its stated simple rate?
They are equal under the same time basis
The borrower receives the full principal, so I / (P x T) recovers the stated rate.
Slater, Ch. 17, pp. 451-45240Why must the original term and discount period be kept separate when a note is sold?
They apply to different calculations and waiting periods
Use the full term for original interest and only the remaining term for the bank discount.
Slater, Ch. 17, pp. 458-460