Discount Note
What Is a Discount Note?
A discount note is a short-term debt instrument that is issued at a price lower than its face value and pays the full face value at maturity. Instead of paying periodic interest, the investor’s return comes from the difference between the purchase price and the redemption value.
Discount notes are commonly issued by governments, banks, and corporations.
Why It Matters
Discount notes provide investors with a way to earn income through short-term investments. They are often considered relatively low-risk compared with longer-term securities, depending on the issuer.
Investors may use discount notes as part of cash management or short-term investment strategies.
How Discount Notes Work
Discount notes typically involve:
- a face value (principal amount)
- a discounted purchase price
- a maturity date
- payment of the full face value at maturity
The investor’s profit is the difference between the purchase price and the amount received at maturity.
Example
An investor buys a discount note for $980 that has a face value of $1,000 and matures in six months. At maturity, the investor receives $1,000.
Discount Note vs Coupon Bond
- A discount note does not pay periodic interest.
- A coupon bond pays regular interest payments throughout its life.
FAQs About Discount Notes
Who issues discount notes?
Governments, financial institutions, and corporations.
Are discount notes safe investments?
Safety depends on the creditworthiness of the issuer.
How do investors earn returns from discount notes?
Through the difference between purchase price and redemption value.
Related Terms
