discount rate

Examples of discount rate in the following topics:

• 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.
  • A special discount rate is highlighted in the IRR, which stands for Internal Rate of Return.
  • 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.
  • The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates.
  • (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.

• Risk Adjusting the Discount Rate

  • The discount rate has a few definitions, depending on the context.
  • The primary purpose of a discount rate, or an interest rate in general, is fairly simple.
  • It is at this point that the logic behind adjusting discount rates becomes practical.
  • With this increase in risk, the discount rate can now be risk-adjusted accordingly.
  • This chart illustrates the devaluation of capital over time as a result of various discount rates.

• Calculating the NPV

  • The other integral input variable for calculating NPV is the discount rate.
  • There are many methods for calculating the appropriate discount rate.
  • Since many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors, they may choose to use a variable discount rate.
  • Reinvestment rate can be defined as the rate of return for the firm's investments on average, which can also be used as the discount rate.
  • The payments are discounted using a selected interest rate, signified by the i variable.

• The Discount Rate

  • The interest rate, in this context, is more commonly called the discount rate.
  • The discount rate represents some cost (or group of costs) to the investor or creditor.
  • All of these costs combine to determine the interest rate on an account, and that interest rate in turn is the rate at which the sum is discounted.
  • If FV and n are held as constants, then as the discount rate (i) increases, PV decreases.
  • To determine the present value, you would need to discount it by some interest rate (i).

• The Discount Rate

  • The rate that member banks charge each other is the federal funds rate and the rate the Fed charges is referred to as the discount rate.
  • The rate that member banks charge each other is referred to as the federal funds rate and the rate the Fed charges banks is referred to as the discount rate.
  • The discount rate is the rate that the central bank actual controls.
  • That is the rate banks charge each other, and is influenced by the discount rate.
  • In this manner, the discount rate in tandem with the fed funds target rate are part of an expansionary policy mechanism.

• Present Value of Payments

  • The value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.
  • Therefore, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.
  • In practice, this discount rate is often determined by reference to similar instruments, provided that such instruments exist.
  • The formula for calculating a bond's price uses the basic present value (PV) formula for a given discount rate .
  • The present value of an annuity is the value of a stream of payments, discounted by the interest rate to account for the payments being made at various moments in the future.

• Discount Policy

  • The $1,000 difference reflects the interest rate the Fed charges for the loan, called the discount rate.
  • The Fed could use the discount rate for expansionary monetary policy.
  • For example, the Fed raises the discount rate.
  • For example, the Fed raises the discount rate.
  • The Federal Reserve uses the discount rate to decrease money supply

• Trade Allowances

  • They can get shampoos and other hair products at a cheaper rate and sell them to consumers at full prices.
  • 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.
  • Another challenge is diverting, which is when companies sell to channel members at a cheaper rate rather than pass on savings to consumers.
  • A trade rate discount is offered by a seller to a buyer for purposes of trade or reselling, rather than to an end user.
  • They can get shampoos and other hair products at a cheaper rate and sell them to consumers at full prices.

• Bonds Issued at a Discount

  • Assume a business sells a 10 year, $100,000 bond with an effective annual interest rate of 6% for $90,000.
  • The journal entry for that transaction would be as follows: Cash $90,000 Discount $10,000 Bond Payable $100,000The interest expense each period is $6,000, and the amortization rate on the bond payable equals $1,000 ($100,000/10 years).
  • When a bond is sold at a discount, the market rate of the bond exceeds the contract rate.
  • Generally, the amortization rate is calculated by dividing the discount by the number of periods the company has to pay interest.
  • That means that the amortization rate on the bond payable equal $1,000 ($100,000/10 years).