This section is from the book "Elementary Banking", by John Franklin Ebersole. Also available from Amazon: Elementary Banking.

Suppose A wishes to borrow $1,000 from his bank. He gives his promissory note for the amount, due in sixty days. Instead of collecting interest when the note becomes due the bank will deduct the interest in advance. Suppose the interest to be 6%; the bank will pay him $990. In this way the bank is really getting more than it would by taking the 6% when the note becomes due, for then it would be getting 6% on $1,000; since A must pay $1,000, the bank is really getting interest for sixty days on $990 - or 6.065%. Similarly, A might discount a note of C's which he had in his possession. Banks usually figure the discount on notes for the actual number of days which a note is to run. If a thirty day note fell due on a Sunday, the bank would charge thirty-one days' interest, and, of course, collect the note on Monday. Many banks compute the discount on the basis of 360 days to the year. Bank discount (the sum the bank gets) is not usury, even if the bank gets slightly more than the legal rate of interest. A "discount" is really a loan in which the interest is paid in advance instead of at maturity. The "discount" is also the amount deducted from the face of the note. "Discounting" is the process of securing money on commercial paper (bills as well as notes) by paying interest in advance.

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