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Discount

bill, cent, loan, amount and rate

DISCOUNT. The amount of deduction which is allowed for immediate payment of a debt Which is not yet due. A tradesman may allow discount if, instead of credit being taken, payment is made in cash ; and so in the case of a bill of exchange, if he receives payment at once instead of waiting until the bill falls due, discount is allowed. But from a banker's point of view, the usual way to regard discount is to look upon it prac tically as interest charged for a loan of the amount until the bill is due. The difference between interest for a loan and discount on a bill is that the interest is not payable, in an ordinary way, until the end of a half year, whereas the discount is paid at the time the bill is discounted, e.g. if a loan of /1,000 is granted on January 1 at 5 per cent. interest, the interest due at December 31 will be {50 ; but if a bill for 11,000 is discounted on January 1 at the same rate for twelve months the banker only pays over 1,950, the {50 being credited at once to his discount ac count, so that the banker practically obtains the same amount of interest for a loan of {950, when granted by discounting a bill, as he does upon an ordinary loan of 1,1,000 ; and his profit is therefore more than 5 per cent., in fact about 5 per cent., and besides he has the use of his profit (150) for the twelve months.

The following table shows the difference in profit per cent. per annum between lend ing money by way of interest and by way of discount :— From this table it is seen that if a sum of /100 is lent at 20 per cent. the lender

would receive 1100 at the end of a year plus 120 for interest, that is a profit of 20 per cent. ; but if he discounted a bill for 1100 at the rate of 20 per cent. he would advance only ,(.80 and at the year end he would receive payment of /100, that is he would receive {20 for a loan of /SO, or a profit of 25 per cent.

The rate at which a bill is discounted is partly dependent upon the Bank of England Rate, the length of time which will elapse before the bill matures, and the quality of the bill. If there is any doubt as to payment of the bill at maturity, the risk is taken into account by charging a higher rate than in the case of a hill which may be regarded as prac tically certain to be paid when due.

A banker's discount is different from a true discount. A banker's discount is not really interest upon the actual amount a. Ivan eel, but interest upon the amount that is to be repaid. True discount is ascer tained, e.g. by finding what amount at S per cent. will produce ,S100 in twelve months' time. 11 at 5 per cent. will be % I Is. at the end of a year, and if {I is the value of /I, it is found by proportion th Lt {1 ;0 is the value at the end of the twelve months of /95 4s. Md. The true discount is therefore I:4 15s. 2}d. (that is, 5 per cent. on fj-15 is. Md.), whilst the banker's discount is (equal, as sh nvn above, to a rate of, say, 5 ', per cent.).