Notes that are issued for less than their face amount (Par Value). The important thing to remember is that although the Notes are issued below their face amount, the Issuer owes the face amount of the Notes when they mature. This means a holder of the Discount Note receives a return both off the Interest payment or Coupon (if there is one) and by having paid less than it will receive back at maturity. A Discount Note has an Accreted Value on the date it is issued equal to what was paid for it. The Accreted Value creeps up over time to equal the Par Value of the Bond. This creeping is called “accreting” and is treated as Interest expense to the Issuer and Interest income to the Bondholder. If you hold a Discount Note close to your ear, you can actually hear the accretion occurring.
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