Chapter 8 - Short-term financing. This chapter presents the following content: Financing considerations, promissory note, characteristics of promissory note, computing interest, maturity value of note, annual effective interest rate, issuance of note discounted on face value,. | Short-Term Financing Financing Considerations Interest cost Continuing availability of financing method Effects on availability and cost of alternative sources of money Promissory Note Unconditional written promise to pay Promissory Note Unconditional written promise to pay a definite sum of money Promissory Note Unconditional written promise to pay a definite sum of money on demand or at a future date. Promissory Note Unconditional written promise to pay a definite sum of money on demand or at a future date. Person promising to payee is maker Person promised the payment is payee Characteristics of Promissory Note In writing and signed by maker Unconditional promise to pay a certain sum of money Payable to a bearer or stated person Payable on demand or a specified future time May or may not be interest bearing Maturity Date Date when payment is due Calculation Days in month note is dated minus date of note Add number of days in succeeding months until total is reached Computing . | Short-Term Financing Financing Considerations Interest cost Continuing availability of financing method Effects on availability and cost of alternative sources of money Promissory Note Unconditional written promise to pay Promissory Note Unconditional written promise to pay a definite sum of money Promissory Note Unconditional written promise to pay a definite sum of money on demand or at a future date. Promissory Note Unconditional written promise to pay a definite sum of money on demand or at a future date. Person promising to payee is maker Person promised the payment is payee Characteristics of Promissory Note In writing and signed by maker Unconditional promise to pay a certain sum of money Payable to a bearer or stated person Payable on demand or a specified future time May or may not be interest bearing Maturity Date Date when payment is due Calculation Days in month note is dated minus date of note Add number of days in succeeding months until total is reached Computing Interest Interest = Principal x Rate x Time Maturity stated in days $30 = $1,000 x x 90/360 Maturity stated in months $50 = $1,000 x x 5/12 Maturity stated in years $240 = $1,000 x x 2 Maturity Value of Note Principal amount plus interest to maturity $1,000, 12%, 90 day note $1,000 + $30 = $1,030 Annual Effective Interest Rate Average annual interest cost divided by Average outstanding principal Borrow $1,000 with 24 payments of $50 24 x $50 = $1,200 $1,200 - $1,000 = $200 $100 / $500 = 20% Issuance of Note Bearing Interest on Face Value At issuance Increase Cash for amount received (face value) Increase Notes Payable for face value At maturity Decrease Notes Payable for face value Increase Interest Expense for interest to maturity Decrease Cash for total Issuance of Note Discounted on Face Value At issuance Increase Cash for face value less discount Increase Discount on Notes Payable for discount Increase Notes Payable for face value Issuance of Note Discounted on Face Value
