Pure Discount Instrument

AAA

DEFINITION of 'Pure Discount Instrument'

A type of security that pays no income until maturity; upon expiration, the holder receives the face value of the instrument. The instrument is originally sold for less than its face value (at a discount).

INVESTOPEDIA EXPLAINS 'Pure Discount Instrument'

Pure discount instruments can take the form of zero-coupon bonds or Treasury bills.


An example of a pure discount instrument could be a bond with a face value of $100. Its time to maturity is two years and it is currently selling for $85. If the investor holds this bond to maturity, he or she will earn a yield of 8.47% ( (100/85)^(1/2) ).

RELATED TERMS
  1. At A Discount

    This specifically refers to stock that is sold for less than ...
  2. Zero-Coupon Mortgage

    A form of commercial financing in which regular interest and ...
  3. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  4. Lump-Sum Distribution

    A one-time payment for the entire amount due, rather than breaking ...
  5. Face Value

    The nominal value or dollar value of a security stated by the ...
  6. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
RELATED FAQS
  1. What is the difference between the rule of 70 and the rule of 72?

    The rule of 70 and the rule of 72 give rough estimates of the number of years it would take for a certain variable to double. ... Read Full Answer >>
  2. On what basis does the sustainable growth rate fluctuate?

    The main difference between a bond’s yield to maturity, or YTM, and the spot rate is that the YTM uses the same interest ... Read Full Answer >>
  3. What are some classes I can take to prepare for the Series 6 exam?

    The risk-return tradeoff for bonds is the increased yield investors can obtain from corporate and other types of bonds that ... Read Full Answer >>
  4. What level of return on equity is average for companies in the chemicals sector?

    The modified duration is an adjusted version of the Macaulay duration and takes into account how interest rate fluctuations ... Read Full Answer >>
  5. What is the average profit margin of a company in the chemicals sector?

    Macaulay duration and modified duration are used in fixed income markets to determine a bond's duration. The Macaulay duration ... Read Full Answer >>
  6. What is the risk return tradeoff for bonds?

    Macaulay duration and modified duration are mainly used to calculate the durations of bonds. The Macaulay duration calculates ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Basic Investment Objectives

    You might know about different asset types, but do you know how each type contributes to a particular goal?
  2. Bonds & Fixed Income

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
  3. Bonds & Fixed Income

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  4. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  5. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  6. Options & Futures

    Investing 101: A Tutorial For Beginner Investors

    Do want to invest, but don't know how to begin? We'll show you the building blocks you need to get started.
  7. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  8. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  9. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.
  10. Mutual Funds & ETFs

    The EMAG Emerging Mkts Bond ETF: Worth the Risk?

    The Market Vectors Emerging Markets Aggregate Bond ETF (EMAG) might offer long-term rewards, but is now the best time to jump in?

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center