bank discount
Definition
- Noun:
- A deduction from the face value of a bill of exchange or promissory note when it is purchased or paid before it is due: This is the interest, calculated on an annual basis, that is subtracted in advance from the principal amount of a loan or the maturity value of a note.
Usage
- The term "bank discount" is used primarily in finance and banking contexts to describe the method of calculating interest for short-term loans or commercial paper. It represents the fee a bank charges for providing funds before an obligation's maturity date.
Examples
- Noun:
- The company received immediate cash by selling its note at a bank discount.
- To calculate the proceeds, you must subtract the bank discount from the note's maturity value.
Advanced Usage
- "True discount" vs. "bank discount": In financial mathematics, "bank discount" uses a different calculation basis than "true discount" (which is based on the amount actually received). Bank discount is calculated on the maturity value, not the present value.
- The bank discount rate will yield a slightly higher effective interest rate than the stated simple interest rate.
Variants and Related Words
- Discount rate (n): The interest rate used to calculate the bank discount.
- The Federal Reserve's discount rate influences other interest rates.
- Discounting (n/gerund): The process of applying a bank discount.
- The discounting of commercial paper is a common banking service.
Synonyms
- Discount: A general term for a deduction from a stated price or value.
- Interest in advance: Describes the nature of the charge.
Related Phrases
- Trade discount: A reduction from the list price offered to buyers in the same trade, unrelated to payment timing.
- Cash discount: A reduction offered for prompt payment of an invoice.
Noun
-
interest on an annual basis deducted in advance on a loan
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