For: Discount (band)
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For: Discount (band)
Merge: date=March 2009
Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee.See "Time Value", "Discount", "Discount Yield", "Compound Interest", "Efficient Market", "Market Value", "Opportunity Cost":
J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms", Baron's Financial Guides, 2003. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date.See "Discount", "Compound Interest", "Efficient Markets Hypothesis", "Efficient Resource Allocation", "Pareto-Optimality", "Price" & "Price Mechanism", "Efficient Market":
John Black, "Oxford Dictionary of Economics", Oxford University Press, 2002. The discount, or charge, is simply the difference between the original amount owed in the present and the amount that has to be paid in the future to settle the debt.
The discount is usually associated with a discount rate, which is also called the discount yield. . The discount yield is simply the proportional share of the initial amount owed (initial liability) that must be paid to delay payment for 1 year.
Discount Yield = "Charge" to Delay Payment for 1 year / Debt LiabibilityIt is also the rate at which the amount owed must rise to delay payment for 1 year.
Since a person can earn a return on money invested over some period of time, most economic and financial models assume the "Discount Yield" is the same as the Rate of Return the person could receive by investing this money elsewhere (in assets of similar risk) over the given period of time covered by the delay in payment. The Concept is associated with the Opportunity Cost of not having use of the money for the period of time covered by the delay in payment. The relationship between the "Discount Yield" and the Rate of Return on other financial assets is usually discussed in such economic and financial theories involving the inter-relation between various Market Prices, and the achievement of Pareto Optimality through the operations in the Capitalistic Price Mechanism, as well as in the discussion of the "Efficient (Financial) Market Hypothesis". Competition from other firms who offer other Financial Assets that promise the Market Rate of Return forces the person who is asking for a delay in payment to offer a "Discount Yield" that is the same as the Market Rate of Return. The person delaying the payment of the current Liability is essentially compensating the person to whom he/she owes money for the lost revenue that could be earned from an investment during the time period covered by the delay in payment. Accordingly, it is the relevant "Discount Yield" that determines the "Discount", and not the other way around.
