# How to Compute the Interest of an Interest Bearing Promissory Note

Whether you're shopping around for a simple interest promissory note or a discount promissory note, the calculation of interest remains the same. However, the two types of notes differ in how they handle interest. For a simple interest promissory note, you pay interest on the loan upon maturity. For a discount promissory note, you pay interest at the commencement of the loan by receiving a note discounted from its face value.

## Step 1: Compute the Term Length

Count the number of days between the issuance of the promissory note and its maturity to calculate its term length. For example, if a note spans August 15 through November 13, there are 90 days in its term.

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## Step 2: Calculate the Fraction of a Year

Divide the number of days by 360 to convert the term into a fraction of a year. This fraction might be less than or greater than one year, depending on the term length. In the example, divide 90 by 360 to calculate 0.25 of one year.

#### Tip

Using 360 as the number of days is the Banker's Rule, but some lenders use the actual number of 365 days in a year instead. Therefore, ask your lender which method it employs when calculating interest.

## Step 3: Calculate Term Interest Rate

Multiply the fraction of a year by the annual simple interest rate to calculate the term interest rate. Continuing with the example, if the annual interest rate was 10 percent, multiply 0.25 years by the 0.10 annual rate to get a term rate of 0.025.