A note that constitutes a short-term debt obligation issued at a discount to par (its par value). The note makes no periodic interest payments; the holder receives the note’s par value at maturity, with the difference between its par value and discount-adjusted value representing its return or payoff. The maturity dates of such notes are less than a year.
Similar to discount bonds (zero-coupon bonds or zeros) and treasury bills (T-bills), discount notes are typically issued by investment-grade private borrowers and certain credit-worthy government-sponsored agencies.
For example, a one-year, $1,000 face value discount note purchased at issue at a price of $960, would pay off $40 or 4.16% ($40/$960).
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