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Banks provide their customers with various discounts for the short-term money market. The removal of interest that is levied on the loan from the amount of loan is referred to as discounts. The banker’s discount-banker’s gain is similar entities and both of the banker’s discount-banker’s gain provides profits to the bank. In this article, an explanation of banker’s discount-banker’s gain would be done. The calculation of bankers’ discounts is done on rates of interest. Here relation would be shown between bankers’ discounts with simple interest.
Discussion of Banker’s Discount-Bankers gain
Banker’s Discount
The banker’s discount can be explained as the difference obtained from the amount that is shown on the exchange bill that has been sent by a customer to the bank to complete its payment and the amount received by the customer after the bank has incurred its payments. These are calculated on a yearly basis based on a certain rate of interest. This rate is calculated on the amount estimated on the bill for the unexpired period of time. In the bank, the simple interest is deducted on the face value for the time that would not expire. Face value is described as the amount that is shown on the bill and which is to be paid before the due date. Thus it can be explained as the SI on the face value or the amount that remains due for a certain period from the date when the bill was discounted. This remains discounted till the due date which is legal or for the unexpired period of time. The formula of bankers discount can be represented as:
BD= (FV* r * t)/100
Where BD represents bankers’ discount;
FV as face value;
r as the rate of interest and
t as the time respectively.
Banker’s gain
The amount that is kept at a particular rate for a mentioned period of time is going to amount to the sum of money at the end of the specified period is termed as present value, whereas the interest that has been applied to the present value is regarded as a true discount. However, if in any instance a bank deducts a true discount on the amount of face value for a specific period of time it will not get anything. Thus banker’s gain can be said as the difference of the bankers discount with the discount that is true. The formula can be represented as:
PW (1+RT/100) = F
BD= FRT/100
TD = PW X RT/100
BG = BD -TD
where PW = Present worth or present value
F= Face value
R =Rate of interest
T =Time
TD = True Discount
BG = Banker’s gain
BD = Bankers Discount
Simple interest & Compound interest
Simple interest can be described as the method that is used for the calculation of amounts of interest given on a particular amount of money (principal) at a specific rate for a certain period of time. Interest is described as the cost that is applied to the borrowed money. It is the amount that is paid by the borrower to the lender on the amount of the loan. It is represented by the formula:
A = P (1+rt)
Where A = final amount
P = Principle balance
r = Rate of annual interest and
t= Time
Compound interest is the amount of interest that is calculated by the addition of interest in the principal amount of a deposit or any loan. It is a result of reinvesting the interest amount instead of paying it. It is calculated based on the initial principle as well as the interest that was accumulated at a specific period of time. Simple interest is calculated based on principal amount whereas compound interest is calculated based on accumulated interest as well as the principal amount. Compound interest can be represented by the formula:
A = P (1+ r/n)nt
Where A = Final amount
P = principal amount
R = rate of interest
N = times of interest per period
T = time period
Simple interest and banker’s discount
Taking an example F buys goods on credit for 3 months from merchant S. S prepares a bill and allows F grants to withdraw money from the bank after 3 months. However, if S wants money before 3 months he can take it from a banker. The banker after deducting SI on face value would provide the money on a discounted bill. Therefore, it can be said that a banker’s discount is the SI that is taken on face value from the discounted date and the legally due date. The legal date is the grace period for three days after the due date. It is to be noted that if the bill does not contain any date then a grace period could not be added to the bill.
Conclusion
In this article, discussions have been made on the discount provided by the bank. It discusses the banker’s discount-banker’s gain and how it is calculated. BD is the SI on the face value of the amount whereas BG is the difference between the BD with the TD. Both the banker’s discount-banker’s gain is parallel to each other and they ultimately provide profit to the bankers. The article has illustrated the formula of all the entities.
