A discount note is a kind of financial instrument which is issued at a discount. It is a short-term debt obligation which does not have a guarantee on the interest rate which is usually expected once other types of securities mature. Therefore, the investor does not depend on interest payments, but makes a profit once the note matures at par value higher than the price paid for its purchase. The increase in price is then used as a basis for the profit of the investment. Discount notes mature within a very short period. One year is usually the longest period of time it takes for such notes to mature.
Discount notes are usually issued by entities which are sponsored by the government. In the United States, these may come in the form of Treasury bills.
While it may seem that, due to the absence of interest rates, the purchase of discount notes is not a very profitable activity, this may actually be the best option for certain types of investors. One of the advantages of investing in discount notes is the fact that they are not as volatile as most other investments. New investors who wish to play it safe may benefit from this option, while still enjoying a small profit. Veteran investors on the more conservative side may also find this attractive.
The purchase of discount notes may also prove to be advantageous for investors who need to make use of the funds after a short period of time. More daring investors may also find it beneficial to invest in a note or two on the side, just to keep their portfolios on solid ground as they venture into riskier investments.