Discounting

Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date. The discount, or charge, is the difference (expressed as a difference in the same units (absolute) or in percentage terms (relative), or as a ratio) between the original amount owed in the present and the amount that has to be paid in the future to settle the debt.

The discount is usually associated with a discount rate, which is also called the discount yield. The discount yield is the proportional share of the initial amount owed (initial liability) that must be paid to delay payment for 1 year.

It is also the rate at which the amount owed must rise to delay payment for 1 year.