2.4.1 Simple Discount at an Interest Rate

In discounting at simple interest, the difference is called the simple discount (on ) at an interest rate (). We may interpret either as the interest on which when added to gives , or as the true discount on which when substracted from gives .

2.4.2 Simple Discount at a Discount Rate

The discount rate for a year is the ratio of the discount for the year to the amount on which the discount is given. The simple discount on an amount , also called bank discount, for years at the discount rate , which can be calculated as follows:

(1)  

And the discounted value, or proceeds, of is given by

(2)  

The charge for some short-term loans may be based on the final amount rather than on the present value. The lender calculates the bank discount on the final amount that must be paid on the due date and deducts it from ; the borrower receives the proceeds . For this reason, bank discount is sometimes called interest in advance. The following equation calculate the maturity value of a loan for specified proceeds/ principals/ present values of .

(3)