Bank Discount Rate
Barron's Banking Dictionary:
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Bank Discount Rate
1. Rate quoted by dealers for short-term noninterest bearing money market instruments, such as commercial paper and Treasury bills. When a bank accepts or agrees to pay a time draft, thus creating a Banker's Acceptance the difference between what the bank pays and the face value of the instrument is the bank's charge (called a Discount) for honoring the draft. The rate is the bank discount rate.
2. Rate that banks charge on discount loans (loans with the interest deducted when the loan is made). The borrower receives the face value of the note, less the discount. A borrower taking out a $1,000 one-year loan pays the lender $50 in interest and receives $950 for use over the year. The rate of interest is 5.263%. ($50 ˜ $950) in this example.
Investopedia Financial Dictionary:
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Bank Discount Rate
The interest rate for short-term money-market instruments like commercial paper and Treasury bills. The bank discount rate is based on the instrument's par value and the amount of the discount.
The bank discount rate is the required rate of return of a safe investment guaranteed by the bank.
Investopedia Says:
Assume an unsecured obligation (e.g., commercial paper) that matures in one year with a face value of $1,000 and a purchase price of $970.
($1,000 - $970) = $30 discount
$30/$970 = 3.1% rate of interest
To simplify calculations when determining the bank discount rate, a 360-day year is often used.
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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