Discounting

In finance, discounting is a mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date. This transaction is based on the fact that most people prefer current interest to delayed interest because of mortality effects, impatience effects, and salience effects.

The discount, or charge, is the difference between the original amount owed in the present and the amount that has to be paid in the future to settle the debt.

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Source: Wikipedia · Image: Wikimedia Commons · Public domain

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