Definition of Promissory Note
A promissory note is like a written promise by one party to pay another party a certain amount of money at a future date. Typically it’s a financial instrument that is issued with a face value to be paid at a future date. There is always a timeline attached to the promissory note and also an interest rate or discount rate. The purpose of a discount rate is to compensate for the effect of inflation.
If a party wants to pay earlier than the maturity date then the face value will be discounted for that period that has not passed yet.
Example of Promissory Note:
A 12 month $100,000 promissory note with a 5% discount if discounted by the payee after 5 months of issue will result in the following payment.
[($100,000 / (1+ 5%/12)(5*12)]= 77,920.54