What Is a Rediscount?

A rediscount occurs when a short-term negotiable debt instrument is discounted for a second time. The reason an issuer would do this is to spark demand for loans when investor interest dries up. When 澳洲幸运5官方开奖结果体彩网:liquidity iౠn the market is low, banks can thus try to raise capital by rediscounting.

A rediscount is also a method for commercial banks to obtain financing from a 澳洲幸运5官方开奖结果体彩网:central bank.

Understanding Rediscounting

To entice investors, debt issuers may offer their bonds 澳洲幸运5官方开奖结果体彩网:at a discount to par, meaning that investors can purchase a bond for less than its 澳洲幸运5官方开奖结果体彩网:par value and receive the full par value of the bond when it matures. If the first debt offer does not generate much interest, the issuer may apply an additional discount, increasing the difference between the discount price and the🀅 par value. When this occurs, the issuer is said to rediscount the bonds.

The term “rediscount” also refers to the process by which a central bank or the 澳洲幸运5官方开奖结果体彩网:Federal Reserve (Fed) discounts a note that has already been discounted by a bank or 澳洲幸运5官方开奖结果体彩网:discount house. A central bank's discount facility is often called a discount window—named after the days when a ༺clerk would go to a window at the central bank to rediscount a company's securities.

The Fed and other central banks are empowered to accept loans and other bank obligations as collateral for advances at the 澳洲幸运5官方开奖结果体彩网:discount window. The discount window is used by the Fed to rediscount private securities as a means to directly provide funding to banks at a particular interest rate and, thus, influence a bank's 澳洲幸运5官方开奖结果体彩网:marginal cost of funds.

Example of Rediscounting

Imagine that a customer that borrows $10,000 from a bank signs a 澳洲幸运5官方开奖结果体彩网:promissory note stating that it will repay the bank $12,500 after a year. This note is discounted by the bank, which subsequently lends out less than the $12,500 澳洲幸运5官方开奖结果体彩网:face value of the note. The differe💙nce of value is the money earned by the bank for the loan.

If a bank wanted to obtain 澳洲幸运5官方开奖结果体彩网:financing from the Fed, it could rediscount this eligible note at the Fed’s discount window for, say, $11,500. In so doing, the central bank would take ownership of the loan note and provide the member bank with funds against the amount the note promises to pay at maturity.

A central bank would rediscount a note for a 澳洲幸运5官方开奖结果体彩网:commercial bank to assist them with current liquidity constraints, which can be attributed to a variety of factors, including seasonality. A central bank would also rediscount a note for banks that are low on 澳洲幸运5官方开奖结果体彩网:customer deposits, which also creates liquidity issues.