Discount rate

For the interest rate charged to banks for borrowing short-term funds directly from the Federal Reserve, see discount window.

For the fees charged to merchants for accepting credit cards, see Discount Rate under Merchant Account.

For discount rate as a term in investment financing, see Discounted cash flow

The discount rate can mean

an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window.

the same as interest rate; the term "discount" does not refer to the common meaning of the word, but to the meaning in computations of present value, e.g. net present value or discounted cash flow

the annual effective discount rate, which is the annual interest divided by the capital including that interest; this rate is lower than the interest rate; it corresponds to using the value after a year as the nominal value, and seeing the initial value as the nominal value minus a discount; it is used for Treasury Bills and similar financial instruments

1 Annual effective discount rate
2 Business calculations
3 See also
4 References
5 External links

Annual effective discount rate

The annual effective discount rate is the annual interest divided by the capital including that interest, which is the interest rate divided by 100% plus the interest rate. It is the annual discount factor to be applied to the future cash flow, to find the discount, subtracted from a future value to find the value one year earlier.

For example, suppose there is a government bond that sells for $95 and pays $100 in a year's time. The discount rate according to the given definition is

$\frac{100-95}{100} = 5.00\%$

The interest rate is calculated using 95 as its base:

$\frac{100-95}{95} = 5.26\%$

For every annual effective interest rate, there is a corresponding annual effective discount rate, given by the following formula:

$d = \frac{i}{1%2Bi}\approx i-i^2$

or inversely,

$i = \frac{d}{1-d}\approx d%2Bd^2$

where the approximations apply for small i and d; in fact i - d = id.

Business calculations

Businesses need to consider the discount rate when deciding whether to spend some of their profits on buying a new piece of equipment, or whether to give the profit back to their shareholders. In an ideal world, they would only buy a piece of equipment if the shareholders would get a bigger profit later. The amount of extra profit that a shareholder requires in the future in order to prefer that the company buy the equipment rather than giving them the profit now is based on the shareholder's discount rate. There is a widely used way of estimating shareholder's discount rates using share price data. It is known as the capital asset pricing model. Businesses normally apply this discount rate to their decisions about purchasing equipment by calculating the net present value of the decision

References

External links

Central banks

Global

Global	Bank for International Settlements · Basel Committee on Banking Supervision · Financial Stability Board

By continent

Africa	Bank of Central African States · Central Bank of West African States · Bank of Algeria · Central Bank of Angola · Bank of Botswana · Bank of the Republic of Burundi · Bank of Cape Verde · Central Bank of the Comoros · Central Bank of the Congo · Central Bank of Djibouti · Central Bank of Egypt · Bank of Eritrea · National Bank of Ethiopia · Central Bank of The Gambia · Bank of Ghana · Central Bank of the Republic of Guinea · Central Bank of Kenya · Central Bank of Lesotho · Central Bank of Liberia · Central Bank of Libya · Reserve Bank of Malawi · Bank of Mauritius · Bank Al-Maghrib · Bank of Namibia · Central Bank of Nigeria · Bank of Somaliland · South African Reserve Bank · Bank of South Sudan · Bank of Sudan · Central Bank of Swaziland · Bank of Tanzania · Central Bank of Tunisia · Bank of Uganda · Bank of Zambia · Reserve Bank of Zimbabwe

Americas	Central Bank of Argentina · Central Bank of Aruba · Central Bank of The Bahamas · Central Bank of Barbados · Central Bank of Brazil · Bank of Canada · Central Bank of Chile · Bank of the Republic (Colombia) · Central Bank of Cuba · Central Bank of Curaçao and Sint Maarten · Eastern Caribbean Central Bank · Bank of the Republic of Haiti · Central Bank of Honduras · Bank of Jamaica · Bank of Mexico · Central Bank of Nicaragua · Central Reserve Bank of Peru · Central Bank of Suriname · Central Bank of Trinidad and Tobago · Federal Reserve System (United States) · Central Bank of Venezuela

Asia	Da Afghanistan Bank · Central Bank of Bahrain · Bangladesh Bank · Royal Monetary Authority of Bhutan · Brunei Currency and Monetary Board · National Bank of Cambodia · People's Bank of China · Hong Kong Monetary Authority · Reserve Bank of India · Bank Indonesia · Central Bank of the Islamic Republic of Iran · Central Bank of Iraq · Bank of Israel · Bank of Japan · Central Bank of Jordan · National Bank of Kazakhstan · National Bank of the Kyrgyz Republic · Bank of Korea · Central Bank of the Democratic People's Republic of Korea · Central Bank of Kuwait · Banque du Liban · Monetary Authority of Macao · Bank Negara Malaysia · Maldives Monetary Authority · Bank of Mongolia · Central Bank of Myanmar · Nepal Rastra Bank · Central Bank of Oman · State Bank of Pakistan · Palestine Monetary Authority · Bangko Sentral ng Pilipinas · Qatar Central Bank · Monetary Authority of Singapore · Central Bank of Sri Lanka · Central Bank of Syria · Central Bank of the Republic of China (Taiwan) · Bank of Thailand · Central Bank of the United Arab Emirates · Central Bank of Uzbekistan · State Bank of Vietnam

Europe	European Central Bank (Eurosystem) · National Bank of the Republic of Abkhazia · Bank of Albania · Central Bank of Armenia · Central Bank of Azerbaijan · National Bank of the Republic of Belarus · Central Bank of Bosnia and Herzegovina · Bulgarian National Bank · Croatian National Bank · Czech National Bank · Danmarks Nationalbank · Bank of England · National Bank of Georgia · Hungarian National Bank · Central Bank of Iceland · Central Bank of Kosovo · National Bank of Latvia · Bank of Lithuania · National Bank of the Republic of Macedonia · National Bank of Moldova · Central Bank of Montenegro · Norges Bank · Central Bank of the Turkish Republic of Northern Cyprus · National Bank of Poland · National Bank of Romania · Central Bank of Russia · National Bank of Serbia · Sveriges Riksbank · Swiss National Bank · Central Bank of the Republic of Turkey · National Bank of Ukraine

Oceania	Reserve Bank of Australia · Reserve Bank of Fiji · Reserve Bank of New Zealand · Bank of Papua New Guinea · Central Bank of Samoa · Central Bank of Solomon Islands · National Reserve Bank of Tonga

Policies and implementation

Policies	Capital requirement · Contractionary monetary policy · Expansionary monetary policy

Implementation	Capital control · Discount rate · Interest rates · Money creation · Open market operations · Sovereign wealth fund

Bretton Woods system

International Monetary Fund · World Bank Group (International Bank for Reconstruction and Development · International Centre for Settlement of Investment Disputes · International Development Association · International Finance Corporation · Multilateral Investment Guarantee Agency)

Lists

List of central banks · Central banks and currencies of Africa · Central banks and currencies of the Caribbean · Central banks and currencies of Central America and South America

Names in italics indicate non-sovereign (dependent) territories, former countries, or states with limited recognition

Discount rate

Contents

Annual effective discount rate

Business calculations

See also

References

External links