A discount is a difference between the price paid for an asset and the specified list price of a good or face value of an instrument. For instance, a bank holding a defaulted mortgage may settle the obligation at a significant discount by accepting less than the principal owed from an investor who is buying the property. The discount may be acceptable to the bank when it avoids the legal expenses and time that would be involved in foreclosure proceedings. This particular type of discount is often called a haircut. A bond is said to trade at a discount to its face value at maturity, and in this context, the discount rate is the interest rate used to determine the present value of future cash flows. The word discount can be used not only as a noun, but also as a verb. A seller is said to discount an asset by lowering the price. |
