What is the 'Bank Discount Rate'
The interest rate for short-term money-market instruments like commercial paper and Treasury bills. The bank discount rate is based on the instrument's par value and the amount of the discount.
The bank discount rate is the required rate of return of a safe investment guaranteed by the bank.
BREAKING DOWN 'Bank Discount Rate'
Assume an unsecured obligation (e.g., commercial paper) that matures in one year with a face value of $1,000 and a purchase price of $970.
($1,000 - $970) = $30 discount
$30/$970 = 3.1% rate of interest
To simplify calculations when determining the bank discount rate, a 360-day year is often used.