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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. historic definition... 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 for it. 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. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.