381. Making Loans.

If a man wishes to borrow money from a bank, he makes out a note that the bank will accept, and has it discounted. In such transactions the most direct way is to make this note payable to the bank.

If an indorser is required, the note is made payable to some acceptable person who is willing to indorse it. The following is a common form of such note :

One Hundred Fifty,

at the Bank of Richmond. Value received.

Due

Dollars

Edward Leakɛ.

If the legal rate is 6%, and the bank discounts this note, it deducts 1% (6% per annum for 60 days) and pays (lends) Edward Leake the balance ($148.50). When the note falls due Edward Leake pays $150. In effect, he borrows $148.50, and pays $1.50 interest in advance for its use for 60 days. Does he pay more or less than 6% per annum on the sum borrowed?

382. Interest paid in advance on the maturity value of a note is called Bank Discount. If a note does not bear interest, its face is the maturity value.

The sum paid by a bank for or on a note is called the proceeds.

383. The term of discount is the time for which the bank computes discount - the period for which it charges interest. It begins on the day of discount, and ends on the day of maturity.

1. Some bankers include both of these days in the term of discount. 2. In states in which days of grace have not been abolished, the term of discount is increased by three days.

3. Banks do no business on Sundays or legal holidays; hence notes falling due on such days are payable on the preceding or succeeding day. Find out when notes falling due on these days are payable in your state.

384. In finding the day of maturity, banks count forward by months or by days as the note specifies.

The term of discount is usually found in days. counting time by days, use the table given in Art. 358.

WRITTEN EXERCISES

In

385. 1. What are the proceeds of a 90-day note for $1575, discounted at 7%?

Discount int. on $1575 for 90 days at 7% = $27.56.

Proceeds

=

2. Find the discount and proceeds of a 60-day note for $279, discounted at 6%.

3. Find proceeds of a 30-day note for $4578, discounted at 6%.

4. What is the discount on a 30-day note for $1500, discounted at 6%?

5. Find the discount on a note of $29 for 4 months, at 8%.

Find the discount on each of the following notes:

6. $580 for 60 days at 6%.

7. $1675 for 90 days at 6%.
8. $205 for 93 days at 6%.

$500.

9.

RICHMOND, VA., Dec. 31, 1906.

Two months after date, I promise to pay to H. E. Gum, or order, five hundred dollars, value received.

D. E. STONE. Discounted Dec. 31, at 6%. Find the proceeds.

Feb. 28, 1907; term of discount = 59 days.

Date of maturity

$3000.

10.

NEW YORK, June 30, 1906.

Sixty days after date, I promise to pay to F. J. Kerr, or order, $3000, value received.

T. S. MILLS.

Discounted June 30, at 6%. Find the proceeds.

$600.

11.

RALEIGH, N.C., Sept. 15, 1907.

Sixty days after date, I promise to pay to the order of William Day six hundred dollars, value received.

C. W. BROWN.

Discounted Sept. 15, at 6 %. Find the proceeds.

12. Make out a 90-day note for $1000, dated to-day, payable to Hugh Gordon's order at your bank, and discounted at the legal rate. Then find the proceeds.

386. Hitherto we have been considering notes given primarily for the purpose of obtaining loans. But banks also make a business of discounting (buying) notes given by one person to another in ordinary business transactions.

For example, if John Ray buys a lot on credit from Richard May for $2000 and gives his note for the purchase price, payable in 60 days with interest at 6%, the latter may indorse the note and sell it to a bank for the maturity value less the discount.

When such notes are not discounted on the day of making, the discount is reckoned on the maturity value from the day of discount to the day of maturity.

WRITTEN EXERCISES

387. 1. A gives his note to B for $400, dated March 1, 1907, payable in 90 days with interest at 6%. On March 25, B discounts the note at 6%. Find the proceeds.

Maturity value = $400+ $6 (int. for 90 da.) = $406.
Term of discount = 66 da. (March 25 to May 30).
Discount interest on $406 for 66 da. = $4.47.

Proceeds $406 - $4.47 = $401.53.

In states where both days are included, the term of discount would be 67 days; when grace is allowed, it would be three days more.

Find proceeds of notes described as follows:

Find the proceeds of the following notes, which bear no interest, if discounted at 6% on June 1, 1906:

5. $245 dated May 20, 1906, payable in 55 days. 6. $1265 dated March 2, 1906, payable in 150 days. 7. $565.20 dated April 30, 1906, payable in 90 days. 8. $179.38 dated March 25, 1906, payable in 90 days. 9. For what sum is a 60-day note given, if a bank discounting it at 6% gives the maker $148.50?

Discount on $1 for 60 days at 6% = $.01.

There must be $1 in the face of the note for every $.99 of proceeds.
Hence, $148.50 ÷ $.99 = 150, number of dollars in face of note.

H

EXCHANGE

388. If a man owes money to some one living at a distant place, he can pay the debt in several ways without actually sending the money. He can send a check, a draft, postal money order, or an express money order.

389. The system of paying debts at distant places by means of checks, money orders, or drafts is called Exchange.

If John Brown, of Dallas, owes Richard Byrd, of Nashville, $500, the former may send his check for the amount to the latter, who indorses it and has it cashed. The bank receiving it collects the sum named from the bank on which it is drawn, and may charge a small amount for the trouble of collection.

390. A Postal Money Order is an order drawn by one postmaster on another, directing him to pay a specified sum of money to the order of the person named therein. The extra cost of a money order varies according to the amount of the order: