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.
