How to use the note receivable discounting calculator
- Enter the face value of the note, its interest rate and its term in days.
- Enter how many days you held the note before selling it, and the discount rate the bank charges.
- Choose whether the year has 360 or 365 days for these calculations.
- Read the cash proceeds, the maturity value, the bank discount and the gain or loss against the carrying value.
Formula
Interest = face x note rate x term / days in year
Maturity value = face + interest
Bank discount = maturity value x bank rate x days left / days in year
Proceeds = maturity value - bank discount
The bank takes its discount on the maturity value, not on the face value. Days left is the term minus the days you held the note.
A $20,000 note at 8% for 90 days, sold on day 30
Over 90 days at 8% on a 360 day year the note earns $400, so the maturity value is $20,400. The bank holds it for the remaining 60 days and discounts at 10%, which is $20,400 x 10% x 60 / 360 = $340. The cash proceeds are $20,060.
You had earned 30 days of interest, which is $133.33, so the carrying value was $20,133.33. Selling for $20,060.00 is a loss of $73.33 on the sale. A higher bank rate or an earlier sale makes the loss larger.
Why the discount can beat the interest
Banks charge the discount on the whole amount that will be paid at maturity, and they charge it for every day left. When the bank rate is higher than the note rate the discount can be bigger than the interest you earned while holding the note, which is what produces a loss. A note with a high rate sold close to maturity usually gives a gain.
This is different from selling an invoice. If you are selling unpaid invoices and not a promissory note, the Invoice Factoring Calculator shows fees and advances instead.
Related interest calculations
The interest on the note is simple interest, the same idea as the Simple Interest Calculator. To find interest earned between two dates, use the Accrued Interest Calculator. If a customer is offered a discount for paying early, the Early Payment Discount Calculator puts that discount in terms of an annual rate.
Whether a sale with recourse leaves you with a contingent liability, and how the sale is recorded, depends on your accounting framework. This tool shows the arithmetic only.
Assumptions and limits
- Interest and the discount use simple interest on the day count you choose.
- The note is a single payment at maturity, with no interest paid before then.
- Fees charged by the bank are not included.
- The rates and days are examples. Use the figures from your note and your bank.
Frequently asked questions
Why is the discount taken on the maturity value?
Because the bank will collect the maturity value, so its charge for waiting is based on that amount for the days it waits.
What is the carrying value?
It is the face value plus the interest earned up to the day of the sale. Comparing it with the proceeds gives the gain or loss.
Should I use 360 or 365 days?
Use what your note or bank states. Many commercial notes use 360 days, and the choice moves the amounts by a small percent.
What if I hold the note to maturity?
You receive the maturity value and there is no discount. Set the days held equal to the term minus one to see the effect of a late sale.