Simple Discount Notes

S.

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Jul 13, 2006
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In problems using simple discount notes, how do I know when the bank discount is given vs. the discount rate.

I know the Bank discount = face value x discount rate x time or B = MDT

For instance in this first problem, the discount and proceeds need to be found. I'm asked to find the discount with the formula B = MDT, with M = 12,000, D = 9%,
T = 10/12. The solution would be B = $12,000 x .09 x 10/12 = $900. The discount of $900 is the interest charge on the loan. Next, to find the proceeds, I use P = M - B. P = $12,000 - $900 = $11,100. In this problem I just found the bank discount.

However, in problem 2, they are finding the proceeds. The problem states: Gina Flint signs a 4-month simple discount note with a face value of $8500. Given a discount of 12%, find the proceeds to Flint. The solution states that the bank discount is not known, but we know that the bank discount (or B) = MDT. Therefore, we can substitute MDT in place of B in the following equation.

P = M - B
P = M - MDT (substitute MDT in place of B)
P = $8500 - ($8500 x .12 x 4/12) (substitute values)
P = $8160

Flint receives $8160 but must pay back $8500.

In problem 2, if I was not told that the bank discount was not given, I would have assumed that the 12% was the bank discount. How do I avoid making that mistake? What was the clue to knowing that? :?
 
The AMOUNT is not known: you use the given 12% to calculate it.
I see no problem whatsoever...
 
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