Discount Rate Definition

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Definition Of Discount Rate:

1. Banking: Rate at which a bill of exchange or an accounts receivable is paid (discounted) before its maturity date.
2. Commerce: Rate by which an invoice amount is reduced when a condition is complied with, such as payment on delivery or an order amount that exceeds a certain minimum figure. 3. Investment appraisal: Multiplier that converts anticipated returns from an investment project to their current market value (present value). It is always less than 1, and depends on the cost of capital (current compound interest rate) and the time interval between the investment date and the date when returns start to flow. Formula: 1 ÷ (1 + r) ^n where 'r' is the required rate of return (interest rate) and 'n' is the number of years. Also called discount factor or present value factor. See also discounted cash flow. 4. Securities trading: Amount by which the market value of a bond, certificate of deposit, or share (stock) is below its par value.Other definition of Discount Rate- 1. The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank. The interest rate used in determining the present value of future cash flows. This type of borrowing from the Fed is fairlylimited.Institutions will often seek other means of meeting short-term liquidity needs. TheFederal funds discount rate is one of two interest rates the Fed sets, the other being the overnight lending rate, or the Fed funds rate. For example, let's say you expect $1,000 dollars inone year's time.To determine the present value of this $1,000 (whatit is worth to you today) you would need to discount it by a particular rate of interest (often the risk-free rate but not always).Assuming a discount rate of 10%,the$1,000 in a year's time would bethe equivalent of $909.09 to youtoday (1000/[1.00 + 0.10]).

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