Pure Discount Instrument

A type of security that pays no income until maturity; upon expiration, the holder receives the face value of the instrument. The instrument is originally sold for less than its face value (at a discount). 



|||Pure discount instruments can take the form of zero-coupon bonds or Treasury bills.

An example of a pure discount instrument could be a bond with a face value of $100. Its time to maturity is two years and it is currently selling for $85.  If the investor holds this bond to maturity, he or she will earn a yield of 8.47% ( (100/85)^(1/2) ).