Discount Notes

What are Discount Notes

Discount notes are short term debt instruments which are issued at a discount to par and mature at par and have no periodic interest payments.  Discount notes offer maturity ranges from overnight to 360 days with the exclusion of terms to maturity which correspond to the maturities of the benchmark bill auctions, such as the 3 month and 6 month benchmark bills.

Discount notes are similar to zero coupon bonds and treasury bills in structure; however, they are issued by GSE's or other large corporations.

The two major players in the discount note space are Fannie Mae and Freddie Mac.  Both Freddie and Fannie issue discount notes to shore up capital for their mortage purchasing activities.  Issuance of discount notes are done through a selling group of securities dealers and banks and notes are issued in increments of $1,000.  The selling group, in turn, works the discount note product through their sales arms and drums up demand for the product.  Issuance is currently not available to the general public. 

In 2003, Fannie Mae created a revolutionary product known as DTA, or the Debt Transaction Application.  DTA took a process which was formally done through phone inquiry and automated the pricing of the offerings and enabled Fannie Mae to drastically expand the range of discount note offerings that were available to the market.

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