Discount

What Is a Discount?

In investing, a discount is the gap between a security's market price and a higher reference value. The term appears in several contexts. A bond that trades below its face value, also called par value, is said to trade at a discount. A closed-end fund whose shares trade for less than the value of the assets it holds is another common example. When the price sits above the reference value instead, the situation is called a premium.

How a Discount Is Measured

The discount is usually stated as a percentage of the reference value:

Discount (%) = (Reference Value − Market Price) ÷ Reference Value × 100

For example, a bond with a face value of 1,000 that trades at 950 is at a discount of 5 percent. The same calculation works for a fund, using the value of its holdings per share as the reference.

Why Discounts Occur

Prices can fall below a reference value for many reasons. For closed-end funds, a discount often reflects investor concerns about fees, limited liquidity, or expectations about future returns. For bonds, a discount may reflect rising interest rates or doubts about the issuer's ability to repay. A discount alone does not show whether an asset is underpriced.

Why It Matters to Investors

A discount can point to a possible bargain, but it can also signal real problems. Investors often compare a discount with the asset's net asset value or its yield to maturity and look into the reasons behind the gap. The word also appears in discounted cash flow analysis, where a discount rate is used to calculate present value. That is a different meaning from the price gap described above.