Please explain the "discount" that I read in the financial section that relates to treasures when at sale?

Question

I am wondering if the "discount" at US T Bill sale means that the face value of say $10,000 is discounted to the purchase price of $9,500, (for example a 5% discount) which yields the face value of $10,000 at maturity?
Please advise.
Thanks

Answer 1

Hewlitt.

Answer 2

The word "discount" as it appplies to treasury bonds has a few different meanings.
In the case of a T Bill, which pays no regular interest, the discount quoted is a percentage of par or face value. In this case your yield is the difference between the discount and the par you will eventually receive.
As pertains to treasury bonds (not bills), they too may be sold at a discount to face value. While this is still an indication of the cost at this time to a buyer, yield is another matter. Since periodic payments are made based on the coupon rate of the bond, you receive not only the appreciated value at maturity, but the interim payments as well. So here you have yield measured in a number of ways.: Current yield, Yield to maturity, yield to call (if a call exists) are the typical important yield quotations. Current yield indicates the yield on your original investment based only on the periodic payments. Therefore a thousand dollar face value bond selling at par ($1000.00) with a coupon rate of 5% would have a current yield of 5%. If the same bond were selling at a discount the current yield would be accordingly higher...If selling at a premium, accordingly lower. Remember, this (current) yield does not take maturity (or call) into account.

Answer 3

Yes, the bond traders discount the price in order to raise the yield percentage to be competitive with new bond offerings at today's interest rate.

Answer 4

it simply means that the current market rate is higher than the bond yield rate so that the bond is sold at a discount.

they usually say that the 1mil t-bill is sold at 95 which means sold at a 5% discount.