Discount (economics)

Discount (economics), in commerce, deduction from the price of a commodity. Discounts are usually made in consideration of payment on delivery of merchandise, or of payment within a specified time limit. Quantity discounts are given to purchasers of large quantities. Trade discounts are given to wholesalers and other trade groups to cover the cost of performing specific functions, such as warehousing and merchandising.

In finance, discounts are premiums or considerations given on the purchase of promissory notes, bills of exchange, or other forms of negotiable instrument in advance of their maturity dates. Such discounts make up deductions from the face value of the discounted paper and are made at the time of purchase. The principal agencies engaged in discounting commercial paper are commercial banks and, in a few countries, financial institutions that specialize in that practice. When discounted paper is again put into circulation by a bank or discount house and is discounted again, it is said to be rediscounted.

When discounted paper matures, the holders of such bills and notes receive the full face value of the commercial paper they present for payment; therefore, the practice of discounting bills and notes is, in effect, a means of extending credit in the form of loans; the discounts are regarded as advance collections of interest on the loans. Rates for discounting and rediscounting commercial paper are established by commercial banks and discount houses in accordance with the relative supply of money available for commercial loans. In countries in which the banking system is organized on a centralized basis, discount and rediscount rates are determined in large part by the central banks.