What Is a Discount House?
A discount house, also known as a bill broker, buys money market instruments at a discount and holds or sells them as an investment tool. These can include commercial paper, bills of exchange, treasury bills, and other short term debt instruments. The term “discount house” is more common in the United Kingdom, but businesses serving this basic function can be found around the world. They do business with the government as well as major banks, investment firms, and other financial institutions.
Firms holding money market instruments can approach a discount house about a sale. They may want to get them off their books for a variety of reasons, including the simple need to access capital. For example, a bank could be sitting on commercial paper that it needs to convert into immediate cash. It can offer a bundle of debts for sale to the discount house, which can evaluate them and make an offer.
These companies make a profit by paying less than the face value for the instruments they purchase. The rate of discount can depend on the type of financial product as well as market conditions and associated risks. For financial firms, selling to a discount house involves taking a loss on the debt, because they don’t realize the full value, but this may be acceptable when capital is needed or the books need to be more balanced. They can choose to reject an offer or negotiate if they feel the discount house didn’t offer enough.
After the transfer of the instruments, the discount house has two options. One is to resell them to other investors who are interested in them. The firm may sell at the face value or offer a small discount which still allows them to profit. Another alternative is to retain the instruments until they mature and collect the full value from the debtor. This can be an option for a company with enough liquidity to handle financial needs until the debts mature.
The use of discount houses is one among many tools used to keep the global credit market operational. By selling debt, financial institutions can finance more loans, ensuring a steady flow of capital through the system. Governments can also turn to discount houses to meet short term liquidity crises. Meanwhile, investors can benefit from contracting with a bill broker to buy discounted debt instruments which may yield a profit once they mature.
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