Discount Instrument

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Definition: Discount Instrument

Discount Instrument

Full Definition of Discount Instrument

Discount instruments are money market instruments that are issued at a value less than (or “discounted” from) their stated face value and mature for their face value.

In fixed income markets, there are a variety of instruments that, rather than paying coupons, accumulate value to maturity. They are issued at some price and later mature for a greater value. This article focuses on the short-term money market forms of these instruments. See the article zero-coupon bonds for the longer-term forms.

The money market instruments fall into two categories.

  • The first category might be called accrual instruments. These are issued at some face value and mature for a value equal to that face value plus interest.
  • The second category is discount instruments. These have a face value that represents their maturity value. They are issued at a discount from that face value.

This distinction is illustrated in Exhibit 1.

Exhibit 1: Cash flows of an accrual instrument are compared with those of a discount instrument. The accrual instrument is issued for its face value and matures for its face value plus interest. The discount instrument is issued at a discount from its face value and matures for its face value. In both graphs, the face value is USD 100.

Accrual instruments are quoted with yields. Discount instruments can be quoted on a price or yield basis. Yields are calculated differently for the two types of instruments, so a yield quoted for one is not comparable to a yield quoted for the other.

Yields for accrual instruments are quoted as simple interest rates. Yields for discount instruments are quoted as discount yields. If comparisons with other instruments’ yields need to be made, a discount instrument’s yield may be converted to a bond-equivalent yield.

In the money market, examples of accrual instruments include

  • Eurodollar deposits,
  • certificates of deposit
  • fed funds, and
  • repos

Discount instruments include

  • T-bills,
  • commercial paper, and
  • bankers acceptances.

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Definition Sources

Definitions for Discount Instrument are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 3rd March, 2022 | 0 Views.