IV. BORROWING AND LENDING MONEY: BANK DISCOUNT Bank Discount. Business men often need extra money to use for short periods of time, two or three months, to finance their business: they may need to lay in new stock; to buy new machinery; to build additions to their plants; to pay a larger force of employees. This extra capital is obtained generally from the commercial banks. Banks are willing to lend money to business concerns on promissory notes, provided always that those concerns. are well-rated, known to be honorable in their business dealings; or, if not well-known, indorsed by those who are. For the credit that the banks grant, they charge interest. This interest is always deducted from the face or amount of the note, in advance; it is always reckoned in exact days, from the time that the money is lent until the day that the note falls due. This interest, charged thus in advance by the bank for the use of money, is called bank discount. The amount of money turned over by the bank, the difference between the face of the note and the bank discount, is called the proceeds. The rate charged by the bank is usually the legal rate of the state in which the bank is situated. In times of stress, especially in times when there is much demand for money, and when business conditions may be bad, the banks will charge a larger rate than at times when they have much money on hand, or when business conditions are good. Terms of Discount. The term of a note is the time between that when the note was drawn and the date of maturity. The term of discount is the time between that when the bank accepted the note and the time when the note is due. As a rule, notes given to banks are payable in short periods of time: 30 days, 60 days, 90 days; 1 month, 2 months, 3 months; very rarely, and only from business men of the highest standing, are notes accepted by banks for more then 4 months. If Henry Folsom should borrow the $800 from his bank, due 2 months after Dec. 31, 1917, the date of maturity would be Feb. 28, 1918; but, if it should be due 2 months after Dec. 31, 1919, the date of maturity would be Feb. 29, 1920. If Henry Folsom's note should be due 60 days after Dec. 31, 1917, the date of maturity would be Mar. 1, 1918; but if it should be due 60 days after Dec. 31, 1919, the date of maturity would be Feb. 29, 1920. Therefore: (a) A note, payable one or more months after the date of the note, is due upon the same relative day of the month. (b) A note, payable a designated number of days after the date of the note, is due upon the expiration of the exact number of days. Some banks charge the discount upon the exact number of days left for the note to run, after the day of the discount; others reckon the time including both the day when the discount was granted and the day that the note matures. (c) Bank discount is reckoned upon the exact number of days from the day of discount to the date of maturity. A note drawn May 8, 1917, for 2 mo., is due July 8, but the discount is computed for 61 da. A note drawn Feb. 8, 1917, for 2 mo., is due Apr. 8, 1917, and the discount is computed for 59 da. A note drawn Feb. 8, 1920, for 2 mo., is due Apr. 8, 1920, and the discount is computed upon 60 da. Borrowing from a Bank. Because of the enormous sums of money deposited in them for safe keeping or against checking, banks are able to discount the notes offered by their customers to them. They gain profits also by investing their surplus in well-paying real estate, in stocks, and in bonds; they gain greatly by the discounting of notes, because they always charge a much higher rate of interest than they pay on deposits. They often demand that their customers safe-guard them by having one or more indorsers upon the notes; often, they demand security -real estate, stocks, or bonds. However, whenever the integrity and standing of the borrower are known to them, they require no security except the written promise, or note. This is why it is so vital that a man pay his notes on time. As a matter of fact, in banking circles, character stands for more than property as a basis for credit. Henry A. Folsom borrows at bank $800 on his note. 00 $800 100 Philadelphia, Nov. 9, 1917 Three months after date, I promise to pay to the order of The First National Bank. Eight hundred 00 100 Value Received. Dollars Henry A. Folsom..... If Mr. Folsom is well known to the bank officials, they will accept this note; if his financial standing is not very strong, he may be asked to get some one to indorse the note for him, that is, become responsible for its payment in case he fails to pay. In this case, Mr. Folsom will make the note payable to the indorser. This person indorses the note on the back, thereby promising to pay the money to the bank, if Mr. Folsom fails to do so on time. If Mr. Folsom has good securities available, he may deposit these with the bank instead of getting an indorser. To Discount a Note. Mr. Folsom, having turned in his note to the bank, will receive his money, after the bank has deducted the discount at the legal rate, or at the rate agreed upon. (d) The bank discount is the interest charged in advance upon notes by banks. (e) The proceeds of this note, the amount advanced, equals the difference between the face of the note and the bank discount. If the bank charged Mr. Folsom 6% discount, what were the proceeds of the note on the preceding page? ORAL EXERCISE Find the bank discount on the following notes at 6%: 1. A note for $1800 due in 3 mo. was discounted at a bank at 6%. What were the proceeds? 2. What are the proceeds of a note for $750 due in 120 da. discounted at a bank at 6%? 3. A note for $560 was discounted at the bank at 6%. If the note was drawn Jan. 1, 1918 for 3 mo., what were the proceeds? 4. What is the bank discount on $750 for 60 da. at 7%? Notes Discounted After Date of Making. All notes are not discounted on the day that they are drawn. A note may be discounted at any time between the time of making and the date of maturity. On March 1, Robert Duncan, a printer, gives his note for $900, due in 3 mo., to the Rotary Press Co. in part payment for a new press. The Rotary Press Co. keeps the note in its safe until March 23, when On this date, the firm discounts the note at its bank it needs money. at 6%. What was the discount period? What were the proceeds? 3 mo. from Mar. 1 is June 1, the date of maturity. = = $900. Discount on the note for 70 days at 6% = 10.50 Proceeds $889.50 = |