Discount House

Definition

A discount house is a specialized financial institution, often a bank, that participates in the discount market by providing services primarily related to the discounting of bills of exchange, especially Treasury bills. These entities facilitate short-term borrowing for governments and businesses by purchasing to-be-redeemed bills at a discount, thus providing immediate liquidity.

Discount houses play a crucial role in the money market, affecting liquidity and interest rates. They are essential intermediaries between issuers of short-term debt and investors, helping to maintain market stability and efficiency.

Examples

1. Discounting a Treasury Bill:

   • A company issues a 90-day Treasury bill with a face value of $10,000. A discount house purchases the bill for $9,800, providing the issuer with immediate funds. Upon maturity, the discount house will receive the full face value of $10,000, earning a profit of $200.

2. Working Capital Financing:

   • A manufacturer sells goods to a retailer with a bill of exchange due in 60 days. The manufacturer sells this bill to a discount house at a discount to receive immediate cash flow, which can be used for operational needs.

3. Interbank Transactions:

   • Banks often use discount houses to manage their short-term liquidity needs. For example, a bank might sell its portfolio of discounted bills to a discount house to meet regulatory reserve requirements.

Frequently Asked Questions (FAQs)

What is the role of a discount house in the financial market?

• Answer: Discount houses act as intermediaries in the money market, providing liquidity by purchasing bills of exchange and Treasury bills at a discount, facilitating short-term borrowing, and stabilizing interest rates and market conditions.

How does a discount house earn profits?

• Answer: A discount house earns profits by purchasing bills of exchange and Treasury bills at a price lower than their face value and receiving the full face value upon maturity, keeping the difference as profit.

Are discount houses the same as commercial banks?

• Answer: No, discount houses are not the same as commercial banks. While commercial banks offer a wide range of financial services including loans, savings accounts, and checking accounts, discount houses specialize in the discounting of short-term financial instruments.

What types of financial instruments do discount houses primarily deal with?

• Answer: Discount houses primarily deal with bills of exchange, Treasury bills, and other short-term financial instruments like certificates of deposit and commercial paper.

Can individuals use the services of a discount house?

• Answer: Typically, discount houses cater to corporations, financial institutions, and governments rather than individual consumers.

Related Terms

• Discount Market: A financial market in which short-term financial instruments such as Treasury bills and commercial paper are bought and sold at a discount.
• Bills of Exchange: Written, unconditional orders directing one party to pay a fixed sum of money to another party at a predetermined future date.
• Treasury Bills: Short-term debt obligations issued by a country’s treasury department, often sold at a discount and redeemed at face value at maturity.

Online References

1. Investopedia: What is a Discount House?
2. U.S. Securities and Exchange Commission (SEC) on Treasury Securities

Suggested Books for Further Studies

1. “Financial Markets and Institutions” by Frederic S. Mishkin and Stanley Eakins
2. “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
3. “Money, Banking, and Financial Markets” by Stephen G. Cecchetti and Kermit L. Schoenholtz

Accounting Basics: “Discount House” Fundamentals Quiz

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