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.
Calculating Interest
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.
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.
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.
Step 4: Calculate the Interest
Multiply the term rate by the note's face value to calculate the interest. If the example's face value was $20,000 multiply 0.025 by $20,000 to get the simple interest of $500.