functional discount

Examples of functional discount in the following topics:

• Discounting

  • An example would be a discount on snowmobiles during the summer.
  • For example, a 2% discount on bills paid within 10 days is a cash discount.
  • Trade discounts, also called functional discounts, are payments to distribution channel members for performing some function.
  • Examples of these functions are warehousing and shelf stocking.
  • Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked.

• Trade Allowances

  • For instance, hairdressers can go to the manufacturer to get a discount for buying in bulk.
  • Such a discount might also be used to gain shelf space or a preferred position in the store.
  • Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked with the product.
  • The larger the purchase, the larger the discount.
  • Hairdressers can go to the manufacturer to get a discount for buying in bulk.

• Setting a Credit Policy

  • If a discount is offered, the amount of the discount must also be determined.
  • There are many purposes for discounting, such as to move out-of-date stock, to reward valuable customers, as a sales promotion, or to reward behaviors that benefit the discount issuer.
  • Some common types of discounts include:
  • Seasonal discount (for orders placed in a slack period for example).
  • Trade discount (usually given when the buyer agrees to perform some function).

• The Creation of the Federal Reserve

  • The Fed extends these loans through the discount window and charges what is called the discount rate.
  • The discount rate is set by the Fed, and is important because it radiates throughout the economy: if it becomes more expensive to borrow at the discount window, interest rates will rise and borrowing will become more expensive economy-wide.
  • In this way, the Fed can use the discount window to affect interest rates and the money supply .
  • The diagram shows how the central bank can increase the money supply by lending money through the discount window or purchasing bonds (open market operations).
  • Explain monetary policy as the main function of a central bank

• Discount Policy

  • Demand function constitutes the banks' demand for federal funds.
  • Supply function represents the banks' supply of federal funds to the market because these banks hold excess reserves.
  • Supply function is upward sloping because banks lend more funds for a greater interest rate (i.e. they earn higher profits).
  • Supply function for the federal funds market increases and shifts rightward.
  • Banks can abuse the discount window.

• NPV Profiles

  • The NPV Profile graphs the relationship between NPV and discount rates.
  • The NPV calculation involves discounting all cash flows to the present based on an assumed discount rate.
  • When the discount rate is large, there are larger differences between PV and FV (present and future value) for each cash flow than when the discount rate is small.
  • The independent variable is the discount rate and the dependent is the NPV.
  • It is the discount rate at which the NPV is equal to zero.

• The Discount Rate

  • The Fed makes loans to depository institutions and charges different discount rates for each of discount windows.
  • The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from the Fed's lending facility, the discount window.
  • All discount window loans are fully secured.
  • (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve, at times, uses the term "discount rate" to mean the primary credit rate. ) The discount rate on secondary credit is above the rate on primary credit.
  • The discount rate for seasonal credit is an average of selected market rates.

• Fringe Benefits

  • Other fringe benefits can include employee discount programs at shops, hotels, gyms, movie theaters, and so on.
  • Benefits may also include formal or informal employee discount programs that grant workers access to specialized offerings from local and regional vendors (e.g., movies and theme park tickets, wellness programs, discounted shopping, hotels and resorts, and so on).
  • Some function as tax shelters (for example, flexible spending accounts, 401(k),and 403 (b)).

• The Relationship Between Present and Future Value

  • The FV is calculated by multiplying the present value by the accumulation function.
  • The process of finding the PV from the FV is called discounting.
  • The interest rate (or discount rate) and the number of periods are the two other variables that affect the FV and PV.

• The Lender of Last Resort

  • According to the Federal Reserve Bank of Minneapolis, "the Federal Reserve has the authority and financial resources to act as 'lender of last resort' by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy. " Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals.
  • The rate the Fed charges banks for these loans is the discount rate (officially the primary credit rate).
  • This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.