DISCOUNT

An allowance made for the payment of money before it is due, and is equivalent to the interest of the principal sum diminished by the discount during the time that must elapse before the money becomes payable. The proper meaning of discount, and the rule for computing it,will be best understood from an example. Suppose the rate of interest to be 4 per cent., and that A holds a bill of 104/. payable a year'hence. Suppose, also, that B has a sum of 1007. in hand, which he wishes to layout at. interest for one year. At the end of the year A's bill becomes due, and he receives 104/. B also receives back for principal and interest 104?. It is therefore clear that if at the commencement of the year A had given B his bill, and received from B his 1001., neither party would have gained or lost by the transaction. Hence a bill of 104/, payable a year hence, interest being 4 per cent., is equivalent to 100/. in hand; and the difference between the amount of the bill and its present value, viz. 41., is the discount. Now the discount on 104/. having been found, the discount on any other sum is found by simple proportion. If we observe that 4 is the rate per cent, of interest, and that 104/. is the present worth plus the discount, the truth of the following rule for the computation of discount will be apparent: — "As 100/. with the rate per cent, added is to the rate per cent., so is the principal sum to the discount." This rule supposes the time of payment to be one year; if it is le or more, the result must be diminished or increased in proportion to the time. Bankers and mercantile people, however, instead of computing discount in this correct way, reckon it in the same manner as simple interest, by which, in large transactions, they obtain a very considerable advantage. At 4 per cent, interest is 1 in 25, whereas discount is only 1 in 26. [s. 366]