Discount is a term applied in business to a deduction from a stated price or from a payment due at some future date. The discounts most commonly used include bank discount, trade discount, and cash discount.
Bank discount
is the deduction that a bank makes from the face value of a note. The bank does this when it cashes a note before it is due. Bank discount is determined in the same manner as simple interest. But it is taken in advance, by being deducted from the face value of the note. The difference between the face value of the note and the discount is called the proceeds. For example, the holder of a note may wish to turn it into cash, or have it discounted, before it becomes due. This may be done by presenting the note to the bank and receiving for it the amount of its face value, less the interest due during the term of discount. The term of discount, or time to run, is the period of time following the day the note is presented for payment through the day on which it matures. Bank discount creates a higher effective rate of interest than simple interest. The borrower pays the same amount in either case for the use of the money received. But with bank discount, the borrower receives only the proceeds instead of the face value of the note. Suppose a note for $5,000, dated February 26 and maturing on May 26, were presented to the bank on April 1. The number of days following April 1 through May 26 is 55. If the note bears interest at 12 per cent a year, the interest for this 55-day period would be $91.67 (based on a 360-day year). The bank deducts (discounts) this sum from the face value of the note as its charge. Then the bank pays the balance, or $4,908.33, to the person who presents the note for payment. The bank collects the full sum of $5,000 on the date the note matures.
Trade discount
is a term used by manufacturers and wholesale merchants when they take off a certain percentage of the price given in a price list. This price is called the list price. The list price less the discount is known as the net price. Market values may change after price lists are issued. Changes in list prices are often made by varying the trade discount.
Cash discount
is a deduction of a percentage of a bill for goods sold on credit. A cash discount is given when the bill is paid within a specific period of time. Such a discount might be expressed as 2/10, n/30, which is read as two ten, net thirty. This means that the buyer may deduct 2 per cent from the bill if it is paid within 10 days, or may wait and pay the whole amount at the end of 30 days. Cash discounts may be used to increase the demand for a product or to speed up the collection of bills.
