banker discount

[naveed_786110]

what is the present value, true discount banker's discount and banker's gain on a bill of rs. 104500 in 9 months at 6 percent p.a.

solution

i just solved it in this way [just formula based] but unable to define and interpret banker's discount, as it is the deduction on face value from the date on which the bill is discounted i.e; paid by the banker and legally due date, how this definition applies on this solution and how can we interpret our results.

 

[Ishuda]

what is the present value, true discount banker's discount and banker's gain on a bill of rs. 104500 in 9 months at 6 percent p.a.

solution

i just solved it in this way [just formula based] but unable to define and interpret banker's discount, as it is the deduction on face value from the date on which the bill is discounted i.e; paid by the banker and legally due date, how this definition applies on this solution and how can we interpret our results. ...

If I understand you correctly, you don't quite know what the bankers discount is although you can use a formula to compute it. If that is the case, the way I look at it is the bankers discount includes the additional amount of money charged the customer so that the banker receives not only the present interest rate on the money 'loaned' but also an amount he charges for his services.

For example, suppose you have a note you can collect rs. 10500 in 1 year and present interest rates are 5% p.a. Then the present value of that note is rs. 10000. So if the banker gave ('loaned') you the rs. 10000 and collected rs. 10500 in a year on the note he would be getting 5% interest on his money but receive nothing for his services. The amount he charges for his services is called the bankers gain and would be the rs. 10000 minus the amount the banker actually gave you for the note. The way that is computed is to charge the interest not on the present value but on the face value of the note, i.e. the banker will charge the customer 5% interest on the rs. 10500 which is rs. 525 in order to get a bit extra for his service fee. So the banker would give you $9975 for your note which means you would be paying the banker rs. 25 now for his services plus rs. 500 in a year on the rs. 10000 he 'loaned' you on the note. Another way to say that is that the bankers discount is rs. 525 and the bankers gain is the bankers discount (the rs. 525) minus the true discount (the rs. 500).

If that is not what you meant, please elaborate on your question.

BTW: In real life there is a minimum the banker would charge for their services so that the customer might receive even less than what would normally be charged by computing interest on the face value of the note.