The Concept of Discount in Finance and Investment
What is discount?
When a security is selling for less than its inherent or basic worth, it is said to be trading at a discount in the world of finance and investment.
Answer:
In finance and investment, a discount is a term used to describe when a security is selling for less than its intrinsic value or original worth. This situation can occur for various reasons and is an important concept to understand in the financial market.
Discounts play a significant role in the financial world, particularly in the trading of securities and bonds. When a bond's price is below its par value in the fixed-income market, it is considered to be trading at a discount. The discount amount is calculated as the difference between the actual purchase price of the bond and its face value.
Bonds often trade at a discount due to factors such as changing interest rates, credit issues with the issuing company, or perceived risks compared to similar bonds in the market. Investors pay less than the face value of the bond when it is trading at a discount, which can impact the overall return on investment.