A discount note is a type of short-term debt obligation that investors can purchase. This type of note is purchased at a discount to the face value. The investor then realizes appreciation in the note and brings in a return on the investment.

Discount Notes

This type of investment is very similar to a zero coupon bond. With a discount note, you are essentially purchasing a debt obligation much like a bond. You also buy it at a deep discount from the actual face value of the note. Then, you keep the note for the entire duration of the term. At the end of the note term, you can turn in the note, and you will receive the full face value of it. Instead of there being regular coupon payments, as there are with most bonds, all of the interest accrues and adds value to the note. All of the returns are realized at once when the investor turns in the note.

Who Issues Them

In most cases, discount notes are issued by government-sponsored agencies. These government-sponsored agencies issue these notes as a way to raise short-term capital for different projects. For example, Freddie Mac and Federal Home Loan Banks commonly issue discount notes to investors.

Safety

One of the biggest advantages of investing in this type of security is the safety that comes with it. When you purchase a discount note, you are working with an organization that has very good credit. In most cases, they are backed by the full faith and credit of the United States government. This means that there is virtually no chance that the company would ever be able to default on the debt. Even if they did not have enough money, the government would step in and provide them with financial assistance.

Specific Objectives

When you invest in a discount note, you can do so with a specific objective in mind. This type of investment does not pay you regular interest payments, as a traditional bond would. Instead, you invest a specific amount of money, and you know that at a certain point in the future, you will receive a larger amount of money back. This allows you to map out a specific course of action when it comes to your investments. You can come up with a plan for reaching a certain goal, such as coming up with money for the down payment on a house.

Short-Term Debt Obligation

Discount notes are considered short-term debt obligations. In most cases, they have a maximum maturity date of one year from the time they are issued. This makes them a substantially different type of investment when compared to traditional bonds. Most bonds are for periods of 10 years or longer. For individuals who like the idea of getting guaranteed returns but want better rates than a savings bond, investing in a discount note from a government agency can make a lot of sense for them.

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