A discounted note payable is given by the issuer at a price less than the face value of the note. When the note payable is given, the issuer receives from the party to which the note payable is being given an amount less than the face value of the note payable. At a later date, the issuer would have to pay back the party to which the note payable was given and the amount to be given is equal to the face value.

There is no interest charged as such in this transaction, instead the difference between the amount received initially and the face value of the note payable is the charge that the party issuing the note payable has to bear. This can be treated as the interest incurred for the particular period of time.