The percentage or price of a security below its par or face value. Taking the face value as $100, a share of stock selling at 95 would be selling at 5%, or $5 per share, "discount." The par value of various securities differs, however (see " Par "), therefore, it does not argue that because a share of stock is quoted at 95 it is selling at a " discount," for, if by chance the face value of that share happens to be $50, it would really be selling not at a " discount," but at a premium of 90%. There are exceptions to this, however, for which see reference to stock exchange rules under "Par."
Paper money is at a "discount" when, in order to obtain one dollar in gold, it is necessary to give more than one dollar in paper money. During war times, in the early '60's, it took $1.25 in paper money to obtain $1.00 in gold.
A note is "discounted" when the interest upon the same is deducted by the lender from the amount loaned; that is, the borrower pays the interest in advance. This amount of interest retained by the lender is called the " discount," or "bank discount." The amount of money which the lender obtains, that is, the face of the note less the " discount," is called the "proceeds," or "net avails."
By this method, he does not receive a sum of money equal to the face of the note, because the lender has deducted the interest. There is another plan which may be best explained by an example: Carlton wishes to borrow $10,000 for six months at his bank; he wishes the full amount. The bank proceeds in this way: Interest is figured on the $10,000 for six months at the agreed rate, say 6% per annum. This would amount to $300. Then the interest for the same length of time is figured again at the same rate on $300, amounting to $9. These two interest amounts are added to the $10,000, equalling $10,309. The borrower signs a note for that amount and in return receives $10,000. When the note becomes due, he pays $10,309. Therefore, the amount of " discount," or interest deducted by the bank, amounts to $309.
There is another method of figuring this, which is more favourable to the lender than the above. It is to find the interest, i. e. the " discount " for $1 for the time and rate, which in this case would be 3 cents. Deducting this from $1 you get $.97 as the " proceeds" of $1 after deducting the " discount." As $10,000 is the amount of money which Carlton desires, you divide $10,000 by $.97 the "proceeds" of $1, and get a result of $10,309.28, which is the amount discounted at 6% for six months, which will produce $10,000, the required amount. It will be seen that this method favours the lender to the extent of $.28 in this particular case.
Another question which often arises having a bearing upon this subject is best explained by an example: Wilson holds a ninety-day note for $1,000, dated June 5th, " with interest " at 5%; namely, interest payable at maturity, not deducted, as in the case of "discount." On August 5th he has sudden call for the money and goes to his bank and " discounts " the note for the balance of the time which it has to run. The "proceeds" is figured after this fashion: Wilson is entitled to the interest on the note for the time he has held it, which fact must not be lost sight of. The face of this note then is really $1,000, plus the amount of interest from date of issue to date of maturity; that is, ninety days, which at 5% would be $12.33 (New York method - see "Interest"), making a total face, for the purpose of figuring the discount, of $1,012.33. It is now necessary to ascertain when the note matures. If it had read due in " three months after date," September 5th would have been the date of maturity, but as it is due "ninety days after date" you proceed in this way:
90 days from June 5 + 5 days passed
in June =
Making the note due September 3d and not the 5th, as would have been the case had the note read due in " three months after date." Note this distinction, as it is continually arising. The note, therefore, matures September 3d. " Discount " must be figured, then, from August 5th to September 3d, as follows:
Number of days in August =
Less days passed in August
Add number of days in Sept.
The "discount" will be figured on $1,012.33 at 5% for twenty-nine days, which amounts to $3.97. Wilson will receive, therefore, $1,012.33 less this last amount, or $1,008.36. The main point here is that to figure the "discount" on a note after its date and during its life, which note was made payable "with interest," the amount of interest is added to the face of the note and upon that sum the "discount" is figured for the unmatured time.
(See "Bank Discount " and " True Discount.")
Many things are " discounted " in the stock market and in general business-dealings. When something expected to take place in the future is reckoned upon in advance, and acted upon accordingly, the event is " discounted." As an example: Suppose, previous to a presidential election, stocks are selling at comparatively low figures, and it is thought that the election of a certain one of the candidates would be beneficial to general prosperity, and that if such an election should be realized stocks would consequently advance in price. This fact is "discounted" when the belief of the election is so certain that the advance in stocks takes place some time previous to the actual election.