Bill of Exchange Example & Calculation
Definition: A bill of exchange is a written document requiring a party listed on the bill to pay a specified sum of money at a future date.
Formula:
P = A / (1 + rt)
where:
P = Present value or principal
A = Face value of the bill
r = simple interest rate
t = time period (in years)
Example 1:
Calculate the present value of a bill of exchange for $35,500 drawn on 1 August 2011 for six months, given that the rate of simple interest is 10% per annum.
Solution:
t = 6 / 12 = 0.5 years
r = 10% = 0.1
P = A / (1 + rt) = 35,500 / (1 + 0.1 * 0.5) = 35,500 / 1.05 = $33,809. 52
Thus, the present value was $33,809. 52
Example 2:
A $20,000 bill of exchange has 73 days to run and the rate of simple interest is 8.25 percent per annum. What is the present value of the bill?
Solution:
t = 73 / 365 = 0.2 years
r = 8.25% = 0.0825
P = A / (1 + rt) = 20,000 / (1 + 0.0825 * 0.2) = 20,000 / 1.0165 = $19,675.36
Thus, the present value is $19,675.36
* Next: Find the Principal in Simple Interest
Formula:
P = A / (1 + rt)
where:
P = Present value or principal
A = Face value of the bill
r = simple interest rate
t = time period (in years)
Example 1:
Calculate the present value of a bill of exchange for $35,500 drawn on 1 August 2011 for six months, given that the rate of simple interest is 10% per annum.
Solution:
t = 6 / 12 = 0.5 years
r = 10% = 0.1
P = A / (1 + rt) = 35,500 / (1 + 0.1 * 0.5) = 35,500 / 1.05 = $33,809. 52
Thus, the present value was $33,809. 52
Example 2:
A $20,000 bill of exchange has 73 days to run and the rate of simple interest is 8.25 percent per annum. What is the present value of the bill?
Solution:
t = 73 / 365 = 0.2 years
r = 8.25% = 0.0825
P = A / (1 + rt) = 20,000 / (1 + 0.0825 * 0.2) = 20,000 / 1.0165 = $19,675.36
Thus, the present value is $19,675.36
* Next: Find the Principal in Simple Interest