Discount paper

A discounting security is an interest-bearing security whose interest income is not paid during the term , but only at the end of the term . This can be interesting for tax reasons, as the interest is not taxed every year, but only once. When due, the paper is repaid at face value , so the issue value is below face value. The interest rate is already fixed at the time of issue .

Discounting papers include federal treasury bonds, zero bonds and some types of savings bonds.

Sample calculation

Assumption: nominal value € 10,000; Interest rate 4% pa; 5 year term.

Term year	Interest rate pa	Interest-bearing amount	Interest income	Payout
1	4%	€ 8,219.27	€ 328.77	0 €
2	4%	€ 8,548.04	€ 341.92	0 €
3	4%	€ 8,889.96	€ 355.60	0 €
4th	4%	€ 9,245.56	€ 369.82	0 €
5	4%	€ 9,615.38	€ 384.62	€ 10,000

(compare: compounding paper )