Question

Explain the differences between Pure Discount Loans and Interest Only Loans. Is a Treasury Bill considered a Pure Discount Loan or an Interest Only Loan? Why?

Answer 1

A Pure Discount Loan is the borrowed amount which is to be repaid at a certain time in future in lump sum to the Bond holder .For example, A Bond is issued by the issuer at some (PV) present value Say $900 and redeemed after a period of time at $1000 this amount is given by the borrower to the lender, here interest is not paid.

Interest Only Loans is a kind of loans where borrower makes regular payments ( annually or monthly) that include interest only, for a predefined period of time, when period ends ,the principal must be paid to pay off the debt.

Yes, a Treasury Bill is considered a Pure Discount Loans because the principal amount is repaid in future, without any payment of periodic interest.