A discount is the reduction of either the monetary amount or a percentage of the normal selling price of a product or service. For example, a discount of $10 may be offered from the list price of a product, or as a 10% discount from the list price.
A discount may be given for a variety of reasons, including:
- Earlier payment than the normal credit terms offered to customers, such as a 1% discount in exchange for paying within 10 days.
- A price break due to the purchase of an unusually large number of units, such as a 5% discount if at least 100 units are ordered.
- A price break if a purchase is made by a specific date, such as the end of the month.
- A price break to take goods damaged in transit, or which differ from what the customer ordered.
A discount can also be structured as a rebate, so that it is paid after the point of sale, and only if the buyer applies for payment, usually accompanied by evidence of the purchase, such as the sales receipt and the bar code portion of the box in which an item was sold.
A discount can also refer to the reduced price at which investors buy bonds. For example, if a company were to sell bonds at an interest rate of 8% and a face value of $1,000, a investor might only be willing to pay $950 in order to obtain a higher effective interest rate. When the bond eventually matures, the issuer is obligated to pay the face value of the bond to the investor, thereby generating the higher effective rate. The opposite effect occurs when a bond is sold at a premium; in this case, the effective interest rate is reduced for the investor. The same concept can be applied to any type of debt.