Simple Interest and Simple Discount

Third-party discount note

A note that is sold to a third party (usually a bank) so that the original payee gets the proceeds immediately and the maker pays the third party the original amount at maturity.

Interest

An amount paid or earned for the use of money.

Third party

An investment group or individual that assumes a note that was made between two other parties.

Undiscounted note

Another term for a simple interest note.

U.S. rule

Any partial loan payment first covers any interest that has accumulated. The remainder of the partial payment reduces the loan principal.

Ordinary interest

Assumes 360 days per year.

Exact interest

Assumes 365 days per year.

Banker's rule

Calculating interest on a loan based on ordinary interest--which yields a slightly higher amount of interest.

Simple interest

Interest paid on only the principal of the original loan or investment.

Effective interest rate of a simple discount note

The actual interest rate based o the proceeds of the loan.

Principal

The amount of money borrowed or invested.

Discount period

The amount of time that the third party owns the third-party discounted note.

Federal funds rate

The interest rate when banks actively trade balances held at the Federal Reserve with each other, usually overnight. Banks with surplus balances in their accounts lend those balances to banks in need of larger balances on a short term basis.

Prime interest rate (prime), reference rate, or base lending rate

The lowest rate of interest charged by banks for short-term loans to their most creditworthy customers.

Time

The number of days, months, or years that the money is borrowed or invested.

Rate

The percent of the principal paid as interest per time period.

Adjusted balance due at maturity

The remaining balance due at maturity after one or more partial payments have been made.

Adjusted principal

The remaining principal after a partial payment has been properly credited.

Maturity value

The total amount of money due at the end of a loan period--the amount of the loan and the interest.