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454. Banks Loaning Money. One of the chief functions of a bank is to loan money, and this is also the bank's chief source of income. A bank which has $100,000 in deposits may loan out $75,000, keeping only $25,000 in cash. This is possible because experience has shown that only a small fraction of the total deposits will be drawn out in the course of a few weeks.

The loans which banks make are usually for a short time so that in case of need the bank can collect funds quickly.

455. Bank Discount. The bank collects interest at the beginning of the period for which the loan is made instead of at the end as in ordinary loans. The deduction of interest at the beginning of the period is called bank discount.

The difference between ordinary interest and bank discount is shown by the following example.

(a) If a man borrows $1000 at 6%, ordinary interest, for one year, he gets the use of $1000 for one year and pays $60 for that use.

(b) If a man borrows $1000 at 6% bank discount for one year, the bank deducts the $60 interest at the beginning of the year and the man gets the use of $1000-$60 $940 for one year and pays $60 for

that use.

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Hence we see that bank discount is more favorable to the lender than ordinary interest.

456. Proceeds of a Note. - The amount left after the bank discount is deducted is called the proceeds of a note. The time which the note has to run from the time it is discounted until it is due is called the term of discount.

WRITTEN EXERCISES

Find the proceeds of each of the following notes:

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When money is

457. Discounting Interest-bearing Notes.

borrowed from a bank on ordinary bank discount the notes given do not bear interest. The bank collects its interest by discounting the face of the note. However, interest-bearing notes obtained in the course of business are frequently discounted at the bank. In this case the discount is computed on the amount of the note at maturity. Problem. A note for $7000 bearing interest at 7% due in 90 days is discounted at the bank at 6%, 45 days before it is due.

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458. Call Loans.- Loans on which payment may be demanded at any time are called call loans. Notes given for call loans read "On demand I promise to pay." (See page 358.) The rates of interest on call loans are usually lower than on time loans. A bank can afford to make a call loan to a customer of unquestioned financial responsibility at a very low rate because the certainty that the money may be had any day makes it as good as cash in the vault for the purpose of the bank.

Interest on call loans is computed the same as interest on ordinary loans and not as bank discount, because the time of the loan is not known when it is made.

Problems of interest arising from call loans are more likely to involve difficulties arising from the number of days than those connected with ordinary time loans.

WRITTEN EXERCISES

Find the amount due on each of the following loans :

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DRILL IN FUNDAMENTALS

Find the net proceeds of the following bills and check:

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Reduce the fractions to percentages and check. Find each per

cent to the nearest hundredths of one per cent.

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CHAPTER XXX

CASH BALANCE IN BANK

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459. Bankers' Cash Account. A bank is constantly called upon to cash checks for its customers. It is therefore necessary for the banker to be able to tell by a mere glance at his book whether a certain customer has sufficient funds in the bank to pay a check which may be presented. For this reason the banker keeps a cash account with each customer which is in substance as shown on page 375.

At the close of the day's business all checks against the account of James B. Ward are added and total debited to his account. The account is credited with all deposits as shown by the cashier's deposit slips. The balance is then posted at once. Compare page 38.

WRITTEN EXERCISES

During the month of January, W. R. Stokes & Co. make deposits and draw checks as follows: Deposits for the successive days beginning Jan. 3 $4300, $2450, $3425, $1375, $1560, $1250, $600, $1390, $500, $420, $700, $360, $340, $480, $250, $600, $580, $420, $470, $450, $390, $320, $370, $440. Withdrawals: 4th, $2500; 7th, $1980; 8th, $260; 10th, $2640; 11th, $960; 14th, $365; 15th, $425.50; 17th, $1945.80; 18th, $2391.60; 20th, $349.10; 23d, $462.80; 24th, $2360.40; 25th, $1781.20; 28th, $4960; 29th, $320.15; 31st, $2430.75. Balance Jan. 1 was $5390.40. Arrange this account as on page 375.

460. Interest on Daily Balances. — Banks frequently allow a low rate of interest on daily balances in a checking account provided these exceed a certain amount.

Example. Find the interest on the daily balances on the opposite page, the rate being 2%.

Solution. The balances are given in the right-hand column of the account. Adding these we find they are equal to $921,611.33 for one day. Multiplying this by 5 X 180 1850 we have $50.49, which is the required interest.

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