Discount Note

Nope, not a fancy name for those coupon clippings in your junk drawer.

Discount notes are short-term, discounted, fixed-income debt instruments, normally not lasting longer than a year. You might find discount notes being sold by government-sponsored agencies (think Freddie Mac, the Federal Home Loan Bank, etc.) or large corporations trying to pay off some debt.

So...discount notes are offered at a discount. What’s the catch, you ask? That you don’t get interest payments while you have the discount note. What’s the point of it, then? You get to reap your rewards when you cash out your discount note at the maturity date. How much? Well, it says there right on the note.

For instance, you could’ve bought a $1,000 discount note for $900. When the note matures, you’ll get paid $1,000, making a net gain of $100 over whatever period of time it took for that discount to mature from an ugly duckling into a beautiful swan-like par value. U.S. Government paper is considered to be a vastly safe investment since they (the government-sponsored ones, at least) are backed by the U.S. Government's ability to tax its citizens. Gee, thanks.