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Bank Discount

Bill of Exchange

Bill of Exchange: A written order to pay a sum of money to a person or entity at a certain date (maturity date)

Bank Discounting

Bank Discounting: The process of a bank buying a bill of exchange from a person or entity before the maturity date and retains a certain amount of money as interest (services)

Discount Amount

Bank Discount=Capital×Discount rate×Duration360\text{Bank Discount} = \frac{\text{Capital}\times\text{Discount rate}\times\text{Duration}}{360}

e=C×t×n360\text{e} = \frac{\text{C}\times\text{t}\times\text{n}}{360}

  • Capital (C or Nominal Value): The amount of money the bill of exchange is worth
  • Discount rate (t): The percentage of the capital the bank retains as interest
  • Duration (n): Number of days until the maturity date

Discount Net Value

Discount Net Value=Discount Amount+Bank Fees+VAT\text{Discount Net Value} = \text{Discount Amount} + \text{Bank Fees} + VAT

Discount Net Value=(C×t×n360Fees)×(1+VAT100)\text{Discount Net Value} = (\frac{\text{C}\times\text{t}\times\text{n}}{360} - \text{Fees})\times(1+\frac{\text{VAT}}{100})

Example

Date of BoE: 5 September
Capital: 24,000$
Discount rate: 7%
Maturity Date: 14 October
Working days: 4 days
Bank Fees: 3% of nominal value
VAT: 10%

Step 1: Calculate the duration

Start date: 5 September
End date: 14 October

From 5 September to 30 September: 25 days
From 1 October to 14 October: 14 days

Total duration: 39 days

Working days: 4 days

Duration: 39 + 4 = 43 days

Step 2: Calculate the discount amount

Discount Amount=C×t×n360=24,000×7100×43360=200$\text{Discount Amount} = \frac{\text{C}\times\text{t}\times\text{n}}{360} = \frac{24,000\times\frac{7}{100}\times43}{360} = 200\$

Step 3: Calculate the discount + banking fees

Banking Fees=3100×24,000=720$\text{Banking Fees} = \frac{3}{100}\times24,000 = 720\$

Discount + Banking Fees=200+720=920$\text{Discount + Banking Fees} = 200 + 720 = 920\$

Step 4: Add the VAT

Discount Net Value=Amount×(1+VAT100)=920×(1+10100)=1,012$\text{Discount Net Value} = \text{Amount}\times(1+\frac{\text{VAT}}{100}) = 920\times(1+\frac{10}{100}) = 1,012\$

Value of Bill Exchange

Value of Bill Exchange=CapitalDiscount Net Value\text{Value of Bill Exchange} = \text{Capital} - \text{Discount Net Value}

Value of Bill Exchange=CDiscount Net Value\text{Value of Bill Exchange} = \text{C} - \text{Discount Net Value}

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