Bank Discount Calculator
Interest taken up front, and what it actually costs.
Work out Bank Discount. Interest taken up front, and what it actually costs. Built to be checked against a model you already have.
What is repaid at maturity.
This is the simple-discount convention used on discount notes, commercial paper and Treasury bills — not the Federal Reserve's discount rate, which is an unrelated policy rate sharing the name.
Proceeds
$9,800.00
on $10,000 of face value
The $200.00 of interest is computed on the $10,000 face value but paid out of the $9,800.00 actually received, so the real cost is 8.16% — 0.16% above the quoted rate. That gap is not an accident of the arithmetic; it is why the convention exists and why Treasury bills are compared on bond equivalent yield instead.
How the Bank Discount Calculator works
On a discount note the interest is deducted from the face value at the start rather than added at the end, so the borrower receives less than they repay and the quoted rate is charged against money they never had. The effective rate is therefore always higher than the rate on the paper. Treasury bills are quoted this way, which is the reason the bond equivalent yield exists.
Also known as: simple discount note calculator · discount and proceeds calculator · treasury bill discount rate calculator · bank discount rate calculator · effective interest rate of a simple discount note
The calculation itself
On a discount note, interest is deducted from the face value at the start rather than added to the principal at the end. Discount equals face value times the discount rate times the term in years.
The borrower receives the face value less that discount, and repays the full face value at maturity. So the interest was computed on a sum they never had.
The effective rate is therefore the discount divided by the proceeds, annualised — always above the quoted rate, and increasingly so as either the rate or the term rises.
In practice
$10,000 of face value at an 8% discount rate for 90 days, on the banker's 360-day year — so exactly a quarter.
The discount is $10,000 × 0.08 × 0.25 = $200. The borrower receives $9,800 and repays $10,000.
The effective rate is $200 ÷ ($9,800 × 0.25) = 8.16%. The quoted 8% understates the cost by 16 basis points on a three-month note.
Extend it to a full year at the same quoted rate and the gap widens: $800 of discount on $9,200 of proceeds is 8.70%, seventy basis points above the number on the paper.
The bond equivalent yield here is 8.28% — the same instrument restated on a 365-day year against the price actually paid, so it can be set beside a coupon bond.
Where this convention lives
Treasury bills are quoted on exactly this basis, which is why the bond equivalent yield exists at all — without it, a T-bill and a note could not be compared.
Commercial paper and banker's acceptances use it too. So does invoice discounting, where a business sells receivables at a discount to face value and receives the balance.
The 360-day year is not a rounding convenience anyone chose recently. It predates calculators, makes a quarter exactly 90 days, and slightly understates the annual cost against a 365-day basis — which is why the day-count basis is a toggle here rather than a fixed assumption.
Where the figure deceives
The quoted rate is the deception, and it is structural rather than accidental. Any rate charged on money you do not receive understates what you pay, and the discount convention does that by construction.
The gap grows with both the rate and the term, so it is smallest exactly where it is quoted most — short-dated, low-rate paper — and largest where a borrower is least able to shop around.
This is also not the Federal Reserve's discount rate, despite the shared name. That is the rate at which banks borrow from the central bank, and it has nothing to do with the arithmetic here.
Acting on it
Convert to an effective rate before comparing a discount instrument against an ordinary loan. Comparing quoted rates across the two conventions always favours the discount one.
For Treasury bills, use the bond equivalent yield when setting them beside notes and bonds — that is what it is for.
On invoice discounting, annualise. A 2% discount for paying 30 days early sounds small and is roughly 24% a year, which is the comparison that matters.
Not financial advice. This calculator is for planning and illustration, not financial advice. Real products carry fees, taxes, and terms it does not model. Confirm figures with your lender or a qualified adviser before committing.
Frequently asked questions
How does bank discount work?
Discount equals face value times the discount rate times the term in years. The borrower receives the face value less that discount and repays the full face value at maturity.
Why is the effective rate higher than the discount rate?
Because the charge is computed on the face value but paid on the smaller amount actually received. On $10,000 at 8% for 90 days, the $200 discount is 8.16% of the $9,800 that changed hands.
What is a 360-day year doing here?
It is the banker's year these instruments are quoted on, which makes a quarter exactly 90 days and the arithmetic tidy. It also makes the rate slightly understate the annual cost against a 365-day basis, which is a toggle here rather than an assumption.
What is the bond equivalent yield on a Treasury bill?
The discount yield restated on a 365-day year against the price actually paid, so it can be compared with a coupon bond. It is always above the quoted discount rate, and the gap grows with maturity.
Where else does this appear?
Commercial paper, banker's acceptances and invoice discounting all work on the same basis. Anywhere the interest comes off the top, the quoted rate understates the cost.
Put this calculator on your own site
Free to use, on any site, commercial or not. Paste this where you want it to appear. It is a plain iframe, so it works in WordPress, Squarespace, Wix, Webflow, Ghost and anything else that accepts HTML.
<iframe src="https://www.thecalclibrary.com/embed/bank-discount-calculator" width="100%" height="640" style="border:1px solid #e2e8f0;border-radius:12px" loading="lazy" title="Bank Discount Calculator"></iframe>The only condition is that the credit line stays visible. It sits inside the frame, so you do not have to do anything to keep it.