A Discount Points, also known as mortgage points or simply points, is a discount that arises when taking out a loan or issuing a bond. It refers to the difference between the nominal value (the amount on the paper) and the amount actually paid out. For example, if a loan of EUR 100,000 is taken out but only EUR 95,000 is paid out, the Discount Points are EUR 5,000 or 5 percent of the nominal value.
The Discount Points is often used to increase the effective interest rate of a loan without changing the nominal interest rate. It represents an anticipated interest payment that immediately gives the lender or investor an advantage. This is taken into account when calculating the effective cost of a loan and can have tax implications. In practice, this means that the borrower receives less money than they actually owe, resulting in higher effective financing costs.
Overall, Discount Points are an important aspect of loan and bond pricing that has various financial implications for both borrowers and lenders.
By applying a Discount Points, both lenders and borrowers can produce certain financial benefits, although it results in higher effective financing costs for the borrower.
Find similar Financial Dictionary topics here:
Back to the Financial Dictionary
This table provides a clear overview of the advantages and disadvantages of Discount Points for both sides, making it easier to weigh up the decision to apply a Discount Points.
| For whom? | Advantages | Disadvantages | |
|---|---|---|---|
| For the borrower / issuer | Increase in liquidity | Provides more funds available in the short term, as less than the nominal value is paid out. | Less funds than the full loan or bond amount are immediately available. |
| Tax advantages | In some cases, the Discount Points may be tax deductible, which can reduce the tax burden. | Not always tax deductible, depending on tax laws and regulations. | |
| Attractiveness of financing | Allows the borrower to present seemingly lower interest rates, which can make financing more attractive. | Higher effective costs and possibly more complicated calculation of actual costs. | |
| Flexibility in financing | Can be used to optimize different financing strategies, especially for long-term projects or investments. | Increases the complexity of financing and requires careful planning and calculation. | |
| For the lender / investor | Immediate capital inflow | The lender or issuer immediately receives a portion of the amount owed, which increases liquidity. | The borrower receives fewer funds, which can reduce the attractiveness of the loan or bond. |
| Risk reduction | The Discount Points serves as a risk buffer and reduces the default risk for the lender. | Cannot completely eliminate risk and may lead to higher effective financing costs for the borrower. | |
| Attractiveness to investors | Increases the attractiveness of bonds as the effective yield is higher when issued below par. | Potentially higher risk for investors, as the actual costs and risks are higher than initially expected. | |
| Competitiveness | Provides the lender or issuer with the opportunity to bid competitively by offering seemingly lower interest rates. | Increases the effective cost and may increase the long-term financial burden on the borrower. | |
| General | Market attractiveness | Can increase demand for certain forms of financing by offering higher effective yields. | Can negatively affect the borrower's credit rating and limit future financing options. |
| Flexibility in interest rate structure | Allows financing to be adjusted to current market conditions without changing the nominal interest rate. | Increases the complexity of financing and requires precise calculations and transparency to avoid misunderstandings. |
Discount Points have various effects in tax law that are relevant for both borrowers and lenders. Here is an overview of the most important points.
The following diagram shows the two actors to whom the tax effects of Discount Points apply.
Discount Points offer tax advantages by reducing the borrower's tax burden through deductibility as a business expense or income-related expense. However, it also increases the complexity of bookkeeping and accounting. Both borrowers and lenders must carefully examine the tax implications and prepare their accounts accordingly in order to make the most of the benefits and comply with legal requirements.
Important terms relating to
Discount Points
| Term | Meaning |
|---|---|
| Discount Points (Abgeld) | Discount that arises when taking out a loan or issuing a bond if the amount paid out is less than the nominal value. |
| Premium | Premium that arises when bonds or shares are issued if the issue price is higher than the nominal value. |
| Nominal value | The value on paper of a financial instrument such as a loan or bond. |
| Payout amount | The actual amount paid out on a loan or bond issue, less the Discount Points. |
| Effective interest rate | The actual interest rate of a loan or bond that takes into account all costs, including Discount Points. |
| Nominal interest rate | The interest rate stated in the loan agreement or on the bond, excluding Discount Points or other costs. |
| Issue | The issuance of bonds or shares by a company or government to raise capital. |
| Borrower | The person or company that takes out a loan and owes repayment, including interest and fees. |
| Lender | The bank or financial institution that grants the loan and receives interest and repayment of the principal amount. |
| Bond | A debt instrument issued by companies or governments to raise capital. |
| Loan | A long-term loan, usually used for specific purposes such as buying a house or property. |
| Loan | A borrowed capital that must be repaid, often with interest, within a specified period of time. |
| Credit card | A means of payment that allows the holder to purchase goods and services on credit, where interest may accrue on the outstanding balance. |
| Payment providers | Companies that provide payment services and process transactions between buyers and sellers, often for a fee. |
| Transaction fee | A fee charged when using financial services such as credit cards or payment providers. |
| Refinancing | The replacement of an existing loan with a new loan, often to obtain better terms. |
This table provides an overview of the most important terms related to Discount Points and their meanings.
This table shows the differences and similarities of Discount Points and similar financial discounts in different areas.
| Feature | Credits | Bonds | Loans | Credit Cards | Payment Providers |
|---|---|---|---|---|---|
| Definition | Discount when borrowing | Discount when issuing bonds | Discount when taking out a loan | No typical Discount Points, but high fees possible | No typical Discount Points, but fees and deductions possible |
| Application | When borrowing | When issuing bonds | When taking out long-term loans | In the form of high interest rates and fees | In the form of transaction fees or currency conversions |
| Calculation | Discount Points = nominal value - payout amount | Discount Points = nominal value - issue proceeds | Discount Points = nominal value - payout amount | Usually no direct calculation as Discount Points | Fees = amount × percentage of transaction costs |
| Percentage calculation | (Discount Points / Par Value) × 100 | (Discount Points / Par Value) × 100 | (Discount Points / Par Value) × 100 | Fees often as a percentage of the transaction | Fees often as a percentage of the transaction |
| Financial effect | Increases the effective cost of credit | Increases the effective cost of issuance | Increases the effective cost of the loan | Increases the effective cost of credit utilization | Increases the cost of the transaction |
| Purpose | To increase effective interest rates | To make bonds more attractive | To increase effective interest rates | To generate revenue for the provider | To generate revenue for the provider |
| Tax treatment | May be tax deductible | May be tax deductible | May be tax deductible | Fees may be deductible | Fees may be deductible |
| Risk for users | Higher effective cost of borrowing | Higher effective cost for investors | Higher effective cost of the loan | High interest and fees | High transaction costs |
| Impact on provider | Receives part of repayment upfront | Receives additional funds on issuance | Receives part of repayment upfront | Generates revenue through fees | Generates revenue through fees |
| Example | Loan of €100,000, payout of €98,000 | Bond with a nominal value of €1,000, sale for €980 | Loan of €50,000, payout of €49,000 | Credit card with 3% transaction fee | Payment provider with 2.5% fee per transaction |
Calculating a Discount Points is relatively simple and is usually done by determining the difference between the face value and the payout amount of a loan or bond. These calculations are useful for understanding the effective cost of a loan or bond and assessing the financial impact of a Discount Points.
Here is the general formula for the Discount Points:
The following formula can be used to calculate the percentage of Discount Points:
The Discount Points percentage indicates what percentage of the nominal value is retained as a discount.
A Discount Points can occur in various financial contexts. Here is a concrete example that illustrates the calculation and effects of a Discount Points:
Example:
A company needs a loan of 100,000 euros. The bank offers a loan at a nominal interest rate of 5%, but with a Discount Points of 2%.
The nominal value of the loan is 100,000 Euro and the disbursement amount is reduced by 2% due to the Discount Points.
Discount Points = 100,000 Euro × 0.02 = 2,000 Euro
The disbursement amount of the loan is therefore reduced by the Discount Points:
Payout Amount = 100,000 Euro - 2,000 Euro = 98,000 Euro
Although the company receives 98,000 Euro, it must repay the full nominal value of 100,000 Euro, in addition to the interest.
The annual interest is calculated on the nominal value:
Annual Interest = 100,000 Euro × 0.05 = 5,000 Euro
If the loan has a term of one year, the company pays at the end of the year:
Total Repayment = 100,000 Euro + 5,000 Euro = 105,000 Euro
To calculate the effective interest rate, we need to relate the total cost of the loan to the actual amount paid out:
Effective Interest Rate = (Total Repayment Payoff Amount / Payoff Amount) × 100
Let's insert the values:
Effective Interest Rate = (105,000 Euro - 98,000 Euro / 98,000 Euro) × 100 = 7.14
In this example, the company has taken out a loan of 100,000 euros with a Discount Points of 2%. The actual amount paid out is 98,000 euros, while the repayment including interest is 105,000 euros. This results in an effective interest rate of 7.14%, which is higher than the nominal interest rate of 5%, reflecting the additional costs due to the Discount Points.
This table provides a clear overview of the main differences between Agio and Discount Points, their calculation, application and impact on the parties involved.
| Characteristic | Agio | Discount Points |
|---|---|---|
| Definition | Premium, the amount that exceeds the nominal value | Discount, the amount that is below the nominal value |
| Use | When issuing bonds or shares above par value | When borrowing or issuing bonds below par value |
| Financial effect | Increases the amount received by the issuer | Reduces the amount received by the borrower |
| Purpose | To raise additional funds | To increase the effective interest rate without changing the nominal interest rate |
| Example | A share with a nominal value of 100 euros is sold for 105 euros | A loan of 100,000 euros where only 98,000 euros are paid out |
| Calculation | Agio = selling price - nominal value | Discount Points = nominal value - amount paid out |
| Percentage calculation | Agio percentage = (Agio / Nominal value) × 100 | Discount Points percentage = (Discount Points / Nominal value) × 100 |
| Tax treatment | May be taxed as capital gains | May be treated as a deductible expense, depending on tax regulations |
| Risk for investors/borrowers | Higher risk as the purchase price is higher than the nominal value | Higher effective costs for the borrower |
| Impact on issuers/lenders | Additional funds when issuing bonds or shares | Receives part of the repayment upfront |
A Discount Points in accounting is the discount that arises when a loan or bond is disbursed at an amount lower than the nominal value. This amount is recognized as prepaid expenses and amortized over the term of the loan or bond.
The amount of the Discount Points is contractually agreed and can vary depending on the credit institution and market conditions. There is no legal upper limit, but the Discount Points should be within the bounds of economic reason and the usual market conditions.
A Discount Points is worthwhile if you want a lower monthly interest charge in the short term and want to take advantage of tax benefits by being able to deduct the Discount Points as a business expense.
You post a Discount Points as prepaid expenses and write it off as an expense over the term of the loan.
Discount Points can be deducted as a business expense for tax purposes, either in the year the loan is taken out or spread over the term of the loan.
Our Bachelor's and Master's degree programs provide you with the relevant knowledge and skills you need for a successful career.
Did you find this article helpful? Do you have any suggestions or questions about this article? Did you notice something or is there a topic you would like to learn more about in our dictionary? Your feedback is important to us! This helps us to constantly improve our content and deliver exactly what you are interested in.
Contact editorial office
