Discount

Discount is an abatement made when a debt or bill is paid before its due date. True discount in arithmetic is the difference between the amount of a future payment and its present value. Thus if £105 be due one year hence, the discount (at 5 per cent.) will be £5, and the present value £100; for £100 will amount to exactly £105 in one year at 5 per cent. But the practice of bankers and bill-discounters, which is sanctioned by mercantile usage, is to charge interest on the principal sum for the period discounted—i.e. from the date when the cash is advanced till the date when payment is due. In the above example, a banker would charge £5, 5s. for discounting a bill of £105 due one year hence, at 5 per cent.; so that he gets an advantage of 5 per cent. over the arithmetical discount, which, as we have seen, is £5. The rate of discount varies according to circumstances, the official bank-rate being usually higher than that obtainable in the market. In the case of foreign bills, instead of a fixed charge being made for discount, the usual practice is to quote a rate of exchange lower than the current rate, so as to cover this charge. The term discount is also applied to the depreciation in value of stock, &c. Thus if a loan is issued at the price of £90 cash for a nominal £100, it is said to be at a discount of 10 per cent. Shopkeepers often grant a discount on prompt payment of an account, or as an encouragement to further dealings.