Pure Discount Instrument

Apple pie. Vanilla ice cream. Pure discount instruments. The classics.

Pure discount instruments are sold for a lower value than the face value. When they expire, the holder can turn them in for the face value. The holder makes the profit that’s the difference between the face value and the price paid at maturity, taking inflation into account. No interest or other fancy tricks. This is called being redeemed “at par.” Like golf.

What securities are like golf? Zero-coupon bonds and Treasury bills, which only pay at maturity. Investments where you only get a lump sum at the end rather than regular payments.

Getting down to brass tacks: the yield for a Treasury bill with a $3,000 face value, maturity in 90 days and costs $2,900:

R = [$100 (discount) / $3,000 (face value)] x [360 / 90 (maturity)] = 0.133, or 13.3%.

Now that’s a good T-bill.