Anonymous
Anonymous asked in Business & FinancePersonal Finance · 1 decade ago

What is a discounted note?

How is a discounted not different from discounting a note? Please help, any answer is appreciated :)

Update:

Discounting a note: meaning that you sell the note to a financial institution and they take on the responsibility of collecting the note.

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  • Anonymous
    1 decade ago
    Favorite Answer

    Hmmm... a very vague question. I'll try and help.

    Typically when you see the terms "discount" and "note" together, it can mean several things:

    1. A discounted "note" is typically an asset backed loan and often a mortgage instrument, although it could also be something like a vehicle.

    2. A discounted note is typically a mortgage or similarly collateralized (meaning there is an asset you can collect if the debt is not paid) loan. The discount will typically come to bear off the face value of the note, i.e. the balance of the note, based on the risk of repayment and because the bank is getting "current" cash rather than getting cash later when it may be worth less due to inflation. So, a $100,000 balance might be naturally discounted by 6 - 10% simply because the time value of money. That would mean you would buy the $100,000 note obligation at 94% of face value. Given our current credit market, it's also possible that you would require it be further discounted based on the mortgage owner's ability to pay. The reason it's referred to as a discounted note is that you are buying the WHOLE note at a discounted price. Just because you're buying it for ,say, $90,000, doesn't mean the person paying the mortgage only has to pay you $90,000.

    To "discount" a note, in the context I think you mean, would mean actually reducing the principal value of the note held as collateral, meaning you would get the note for $90,000, but the mortgage owner would only have to pay you the $90,000.

    In one instance you're buying a financial instrument to collect on an asset at a below market value.

    In the second, you're buying the financial instrument to collect on an asset at a "fair market value" that happens to be discounted off of its face value, which means the person paying also would not have to pay the original full amount.

    At least that's the best I've got without further clarification.

    Hope that helps...

  • 4 years ago

    Discount Notes

  • 1 decade ago

    You have a note that is paying you $1 per day for 1 year. At the end of 1 year you will have received $365. If you get tired of waiting for your money, you can sell the note today. No one will pay you $365 for it; and then have to wait for the money.

    They will pay you $100 today. That is a big discount from the final value. But you might do it so you have a big chunk of cash today; instead of waiting another 364 days. And they will do it because they are giving you $100 and getting back $365..

  • 1 decade ago

    It just means that the note has an implied interest rate included in the overall note, rather than having to pay interest every year. So if you receive a note for, say, $100, when you redeem it, you'll get back $120, as an example. On the other hand, a regular interest-bearing note is cashed in for the same amount it was given for, but it pays (or you pay, depending on what kind of note it is) interest at specific dates throughout the life of the note.

    Hope that helps. :0)

    Source(s): I'm an accountant.
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  • Anonymous
    4 years ago

    Answer: Suggested answer would have been: (Dr) Cash (Dr) Discount on notes payable (Cr) Notes Payable However, answer A is acceptable. Besides, the same could be corrected when adjusting entry is made. (Dr) Discount on notes payable (Cr) Interest expense

  • Anonymous
    5 years ago

    This Site Might Help You.

    RE:

    What is a discounted note?

    How is a discounted not different from discounting a note? Please help, any answer is appreciated :)

    Source(s): discounted note: https://tr.im/6TCSH
  • Anonymous
    5 years ago
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