What is the difference between the discount rate % and the investment rate %?

Question

found here http://www.treasurydirect.gov/RI/OFBills

thanks!

Answer 1

The discount rate determines what "discount" a bond is trading to par value. For example, par value bond of 100 trading at 95 maturing in one year is

(100-95)/100=5%

The interest rate is the rate of return you would expect by buying the bond. In this example you can buy the bond for 95 and in one year it will be worth 100 so

(100-95)/95=5.263%

Notice the difference is because of the denominators. With discount rate you are figuring it at the face value of the bond. With interest rate you are figuring at the current trading price.