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What is a Discount Note?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 September 2016
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Discount notes are financial instruments that are usually sold at a discount and do not include any type of guaranteed interest rate that will be paid upon maturity. For the most part, any discount note will mature in a short period of time, normally no more than one calendar year from the date of issue. One example of this type of note is the Treasury bills issued in the United States.

Discounted notes do provide a couple of advantages for investors. First, they are easily one of the safest investment options available. The extremely low volatility associated with a discount note means the investor has virtually no concerns about sustaining a loss, and will stand to make some small amount of return on the investment. For investors who are very conservative, a discount note can be a good idea.

Another advantage of the discount note is the short waiting period to maturity. Just about any type of discount note, including agency discount notes, will mature in twelve months or less. This means the investor can easily identify when the note will mature and be prepared to use the proceeds from the investment in some new venture.

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However, a discount note is not for everyone. Depending on the financial goals of the investor, tying up resources with low yield notes of this type is simply not viable. While it is true the note is among the safest investing options available today, the return is less than spectacular. Any investor who is willing to run some degree of risk in exchange for a potentially higher return would do well to look for other investment options.

In general, a discount note is a good idea for a new investor who is just beginning to get an idea of how much risk he or she is willing to absorb in order to make money with investing. At the very least, having one or two discount notes in the investment portfolio helps to serve as an anchor or foundation. The notes make it possible for the portfolio to have a solid base of value as the novice investor explores the possibility of more volatile investments with an opportunity for a higher return.

Along with government issued discounted notes, some merchants also use a form of the note as a means of retaining current customers and attracting new ones. This type of discount note involves issuing the note when a purchase of goods is made. The customer receives a discount note that can be applied to a purchase sometime in the future. Generally, there are some terms and conditions that apply to this type of discounted note, such as the necessity of redeeming the note within a specific amount of time after the original purchase.

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