The way I understand discounting, and this is from an example I read yesterday, assume a department store orders $1000 worth of fine china from a distributor on March 1, and promises to pay on April 1 if the china arrives safely before then. The distributor can take the promise to pay $1000 to his bank, and the bank will give him the present value of the note, which is $995, so the distributor can order china from the manufacturer.
I've never discounted a note but I have had notes sold, which means they were discounted. When Fanny Mae buys mortgages, they don't pay the entire value of the note, they pay less, which is discounting.
Accepting notes is one of the primary functions of banks. |
