DEFINITION of 'Discount House'

Primarily operating in the United Kingdom, a discount house is a firm that buys, sells, discounts, and/or negotiates bills of exchange or promissory notes. This is generally performed on a large scale with transactions that also include government bonds and Treasury bills.

A discount house is also called a bill broker.

In the United States, a discount house refers to a large retail store that is able to offer consumer durables at discounted prices because of its ability to purchase in bulk and employ expense-controlling practices.

BREAKING DOWN 'Discount House'

Discount houses are at the heart of London’s money market system and function to provide liquidity in the secondary money market by discounting short-term obligations for those institutions in need of funds. A discount house is a money lender that participates in the buying and discounting of bills of exchange and other financial products such as money market securities, certain government bonds, and banker's acceptances (BA). It functions to ensure that there is adequate liquidity in the money markets by providing a ready market for short-term government guaranteed securities and other money market instruments.

A discount house specializes in discounting short-dated financial securities and acts as an intermediary between a lender and a borrower. It does this by negotiating the purchase of various certificates of deposit (CDs), commercial paper, and other money market instruments mentioned above at less than par value. Through these short-term securities, they are able to borrow funds from commercial banks at a rate below the market rate and lend these funds to borrowers at a slightly higher rate. The interest rate differential constitutes a profit for the discount house.

The Bank of England (BoE) deals directly with the discount houses to counteract shortages of day-to-day funds and credit in the interbank market. To regulate the money supply in the economy, the Bank conducts open market operations which involve expanding or contract the volume of assets held with the Bank. It does this by offering loans to discount houses through commercial paper or government-backed securities. The rate of interest charged on these loans is the discount rate or the rediscount rate. The discount houses use the loans to purchase money market securities from commercial banks, thereby, enabling these banks to meet their temporary needs for loanable funds or for cash reserves. In so doing, the discount houses act as intermediaries between the central bank and the banking system in England.

A discount house does not necessarily have to borrow funds from the central bank first in order to provide loans to commercial banks. It also functions in the reverse scenario. Banks in need of funds will sell commercial paper to the discount house which takes a small spread from the transaction. These bills can be sold to institutions with surplus cash which provide the funds to be loaned. In turn, the Bank of England rediscounts the bills for the discount house and, thus, maintains a direct link with the money market and the prevailing interest rates in the economy. By increasing or decreasing the discount rate – the rate at which the central bank lends reserves to its banking system – the Bank of England can control the cost of borrowing and, in effect, the money supply.

RELATED TERMS
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks ...
  2. Federal Discount Rate

    The federal discount rate allows the central bank to control ...
  3. Rediscount

    Rediscount is the act of discounting a short-term negotiable ...
  4. Discount

    In finance, discount refers to a situation when a bond is trading ...
  5. Discount Note

    A discount note is a short-term debt obligation issued at a discount ...
  6. Market Discount

    The market discount is the difference between a bond's stated ...
Related Articles
  1. Retirement

    Top Discounts For Seniors

    Here is a rundown of some of the best senior discounts across the country.
  2. Small Business

    Capital Budgeting: Which is Better, IRR or NPV?

    Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense.
  3. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  4. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  5. Investing

    5 Misconceptions About Discount Brokers

    While discount brokers are the perfect choice for some investors, their business model could be detrimental to others.
  6. IPF - Mortgage

    Mortgage Points: What's the Point?

    Do you want to buy a house or apartment with lower up-front costs? Learn how mortgage points can help you pay less for your home.
  7. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  8. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  9. Investing

    Buying Natural Resources At A Discount

    Recent investor enthusiasm has pushed prices for many assets into bubble territory. By using closed ended funds, investors can buy these assets at a discount.
RELATED FAQS
  1. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
  2. What are some examples of expansionary monetary policy?

    Learn about expansionary monetary policy and how central banks use discount rates, reserve ratios and purchases of securities ... Read Answer >>
  3. How do I use Excel to get discount rate over time?

    Learn how to calculate discount rate in Microsoft Excel and how to find the discount factor over a specified number of years. Read Answer >>
  4. How can I calculate the carrying value of a bond?

    Learn what the carrying value of a bond means, how it can change, and the easiest way to calculate a bond's carrying value ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center