How to Compute the Interest of an Interest Bearing Promissory Note

An interest-bearing promissory note is an agreement between the borrower and lender that the borrower will pay back the principal amount of the loan, as well as interest payments. The interest is the cost to the borrower for borrowing the money from the lender. Using the "exact" and "ordinary interest" methods, learn how to compute the interest of an interest-bearing promissory note.

Difficulty: Moderately Easy

Instructions

1. Locate the principal amount, interest rate and time on the promissory note.

2. Calculate the interest using the "exact interest" method, which uses 365 days in a year in the formula. Divide the time by 365. Multiply this amount by the interest rate divided by 100. Multiply the result by the principal amount. For example, if the principal amount is $10,000, interest rate is 5 percent and the time is 200 days, the interest is $273.97 (10,000x(10/100)x(200/365)).

3. Calculate the interest using the "ordinary interest" or "banker's" method, which uses 360 days in a year in the formula. The 360 is derived by multiplying 12 months by 30 days per month, which is also known as the "banker's year." Using the same example above, the interest would be $277.78 ((10,000x(10/100)x(200/360)).