Rediscount is the act of discounting a short-term negotiable debt instrument for a second time. Banks may rediscount these short-term debt securities to assist the movement of a market that has a high demand for loans. When there is low liquidity in the market, banks can generate cash by rediscounting short-term securities.
Rediscount is a way of providing financing to a bank or other financial institution. Especially in the 19th century and early 20th century banks made loans to their customers by "discounting" the customer's note. The note is a paper document, in a specified form, where the borrower promises to repay a certain amount at a specified date.
Let's say the customer wants to borrow $1000. The bank may ask him to sign a note promising to repay $1100 in one year. The bank is "discounting" the note by paying less than the $1100 face amount. The extra $100 is of course the bank's compensation for paying before the note matures. The Federal Reserve System could provide financing by "rediscounting" this note. Maybe the Fed would give the bank $1050 for the note.
- "Rediscount Definition". Investopedia.
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