TeachMeFinance.com - explain discount
discount -- (1) the sale of a note or other obligation for less than its face value, with the lender obligated to pay the full face value to the holder at maturity. (2) the amount representing the difference between the face value and the lower sales price of a note.
Discount -- The amount taken off; allowance for prompt
payment ; interest deducted or collected in advance.
A promissory note is discounted when the lender on it deducts
(or collects) the amount of the interest on the note at
the time he advances money on it.
A bill of exchange (draft) is discounted when the purchaser
buys it for less than its face value ; the discount is the difference
between the face value of the draft and the amount paid
In discounting interest-bearing paper the interest should
first be charged on the face amount of the paper and then credited
on the amount of the discount. Illustration : At 6 per
cent the discount on paper for $10,000 having one year to run
is $600, but as this $600 is not paid over interest has to be
allowed on it by the lender at the same rate as is charged by
the lender on the whole $10,000. The interest on the $600
amounts to $36 which would, therefore, make the sum received
by the maker of the paper $9,436.
When non-interest-bearing paper is discounted the discount
is the difference, between the face value of the note (the
amount which is to be paid at maturity) and the amount paid
for the note.
Foreign bills of exchange are not said to have been discounted,
but instead to have been sold.
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