Tips on cracking Questions Related To Banker's Discounts

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TIPS on cracking Aptitude Questions on Banker's
Discounts
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Tip 1 Understand the concepts in Bankers
Discount clearly
Scenario Suppose A has borrowed Rs 1000 from B
and this amount should be returned with interest
after 1 year. Let us assume that the market
interest rate is 5 per year Simple Interest. A
hands over to B a note with a Face Value of Rs
1050, promising repayment after 1 year. 1000
(1000 x 0.05 x 1yr) 1050 After 6 months, B
decides that he needs the money immediately and
cannot wait till the due date which is 6 months
away. B approaches a bank and hands over the note
from A with Face Value of Rs 1050 due after 6
months. Calculating True Discount The present
value (or true value) of the note from A is
calculated as follows PV x (1 r x t) FV
Here, PV is the present value, r is the rate of
simple interest, t is time and FV is the Face
Value of the note. Present Value (or True Value)
1050/(1.025) Rs. 1024.4 True discount
Face Value Present Value 1050 1024.4 Rs.
25.6 But, if the bank paid out Rs 1024.4 to B in
exchange for the note, the bank would not make a
profit. The bank does not use True Discount but
uses another formula to calculate the discount
called Bankers Discount.
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Tip 1 Understand the concepts in Bankers
Discount clearly
Calculating Bankers Discount Bankers
Discount The Simple Interest on the Face Value
of the debt for the time period between the
legally due date and the date on which the bill
is discounted is called Bankers Discount.
Bankers Discount FV x r x t 1050 x 0.05 x
(1/2) Rs 26.25 Note True Discount FV FV
/ (1 r x t) FV r x t / (1 r x t) lt FV x
r x t gt True Discount lt Bankers
Discount Instead of discounting True Discount,
the Bank discounts the Bankers Discount from the
Face Value and pays out Rs 1050 26.25 Rs.
1023.75 Bankers Gain Present Value of the
Note Actual Payout (Face Value True
Discount) (Face Value Bankers Discount)
Bankers Discount True Discount This figure is
always positive
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Tip 1 Illustrative examples on Bankers Discount
Question The banker's gain on a sum due 3 years
hence at 12 per annum is Rs. 270. What is the
bankers discount? Solution Bankers Discount
FV x r x t 0.36 x FV True Discount FV PV
FV FV / 1 (r x t) FV FV / 1.36
0.36 x FV / 1.36 Bankers Discount /
1.36 Bankers Gain Bankers Discount True
Discount BD - BD/1.36 270 gt Bankers
Discount, BD 270 x 1.36 / 0.36 Rs.
1020 Question The banker's discount on a
certain sum due 2 years hence is 11/10 of the
true discount. What is the rate? Solution BD
FV x r x t TD FV PV FV FV / 1 (r x t)
FV x r x t / 1 (r x t) BD/ TD 1 (r x t)
11/10 2r 1/10 gt r 1/20 0.05 or 5
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Tip 2 For transactions that do not involve a
bank, use True Value
Question A man purchased a cow for Rs. 3000 and
sold it the same day for Rs. 3600, allowing the
buyer a credit of 2 years. If the rate of
interest be 10 per annum, then what is his gain?
Solution Present Value 3600/1(0.10 x 2)
Rs 3000 Gain Present Value Cost
0 Question A trader owes a merchant Rs. 10,028
due 1 year hence. The trader wants to settle the
account after 3 months. If the rate of interest
12 per annum, how much cash should he pay?
Solution Face Value Rs. 10028, r 12
p.a. Present Value after 9 months
10028/1(0.129/12) Rs 9200
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