Discount explained - Calc Suite - Complete Calculator

 The term discount refers to a reduction in the original price, value, or amount of something. Its specific meaning and application vary significantly depending on the context, primarily in commerce and finance.

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1. Discount in Commerce and Retail

In commerce, a discount is a strategy to increase sales by offering a lower price than the standard list price.

A. Core Calculation

A retail discount is calculated as a percentage of the original price.

$$\text{Discount Amount}=\text{List Price}\times \text{Discount Percentage}$$

$$\text{Selling Price}=\text{List Price}-\text{Discount Amount}$$

Example: A laptop with a list price of $1,000 is offered at a 20% discount.

• Discount Amount: $\$1,000\times 0.20=\$200$
• Selling Price: $\$1,000-\$200=\$800$

B. Types of Commercial Discounts

Type	Description	Purpose/Incentive
Cash Discount	A reduction on an invoice for prompt payment. E.g., "2/10, net 30" (2% off if paid within 10 days, otherwise full amount due in 30 days).	To improve the seller's cash flow by accelerating receivables.
Trade Discount	A price reduction given by a manufacturer/supplier to a reseller (wholesaler or retailer).	To compensate the reseller for performing selling, storage, or distribution functions.
Quantity/Volume Discount	A lower price per unit for purchasing in large bulk. E.g., "10% off when you buy 5 or more."	To encourage large orders and move higher volumes of inventory.
Seasonal Discount	A price reduction offered during a specific time of the year, often at the end of a selling season.	To clear old inventory and stimulate sales during off-peak demand.

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2. Discount in Finance and Valuation

In finance, "discount" is a fundamental concept related to the time value of money and is essential for valuing financial assets.

A. Discounting Future Cash Flows

The process of discounting calculates the Present Value (PV) of future cash flows. Since money today is worth more than the same amount in the future (due to inflation and opportunity cost), future money must be reduced, or discounted, to find its current equivalent value.

$$\text{Present Value}=\frac{\text{Future Cash Flow}}{(1+\text{Discount Rate}{)}^n}$$

Where $n$ is the number of periods.

B. Discount Rate and Discount Factor

• Discount Rate ($\mathbf{r}$): The interest rate used in the discounting formula. It represents the required rate of return or the opportunity cost of capital for an investment, and it reflects the risk associated with the future cash flow. A higher discount rate results in a lower Present Value

• Discount Factor: The decimal multiplier used to convert a future value to a present value. It is the (1+r)n1​ portion of the PV formula.

C. Discount in Securities

• Bond Discount: A bond is said to be trading at a discount when its market price is below its face (par) value (e.g., a $1,000 bond selling for $980). This typically occurs when the bond's stated interest rate (coupon rate) is lower than the prevailing market interest rates, making the bond less attractive to new investors unless the price is lowered.

• Zero-Coupon Bond: A bond that pays no periodic interest and is therefore issued at a deep discount to its face value. The investor's return comes entirely from the price appreciation, which equals the difference between the deeply discounted purchase price and the full face value received at maturity.