What is a 'Discount Rate'
The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.
BREAKING DOWN 'Discount Rate'
The Fed’s Discount Rate is an administered rate set by the Federal Reserve Banks, rather than a market rate of interest. Use of the Fed’s discount window soared in late 2007 and 2008, as financial conditions deteriorated sharply and the Federal Reserve took steps to provide liquidity to the financial system. Discount window borrowing soared to a record $111 billion at the height of the global financial crisis in October 2008, while the Federal Reserve’s board of governors set the discount rate at a postWW II low of 0.5% on Dec. 16, 2008.
A simple explanation of the discount rate used in DCF analysis is as follows. Let's say you expect $1,000 in one year. To determine the present value of this $1,000 (what it is worth to you today), you would need to discount it by a particular interest rate. Assuming a discount rate of 10%, the $1,000 in a year's time would be equivalent to $909.09 to you today (1,000 / [1.00 + 0.10]). If you expect to receive the $1,000 in two years, its present value would be $826.45.
What is the appropriate discount rate to use for a project? Many companies use their weighted average cost of capital (WACC) if the project's risk profile is similar to that of the company. But if the project’s risk profile is substantially different from that of the company, the Capital Asset Pricing Model (CAPM) is often used to calculate a projectspecific discount rate that more accurately reflects its risk.

Discounting
The process of determining the present value of a payment or ... 
Present Value  PV
The current worth of a future sum of money or stream of cash ... 
Federal Discount Rate
The interest rate set by the Federal Reserve that is offered ... 
Bank Discount Rate
The interest rate for shortterm moneymarket instruments like ... 
Discount Window
Credit facilities in which financial institutions go to borrow ... 
Discounted Cash Flow (DCF)
Discounted cash flow (DCF) is a valuation method used to estimate ...

Markets
Explaining the Federal Discount Rate
The federal discount rate is the rate at which eligible banks or other depository institutions can borrow funds from a Federal Reserve bank. 
Investing
Discounting With The Discount Rate
The discount rate is the interest rate you need to earn on a given amount of money today to end up with a given amount of money in the future. Let's say you need $1,000 one year from now to go ... 
Investing
Top 3 Pitfalls Of Discounted Cash Flow Analysis
The DCF method can be difficult to apply to reallife valuations. Find out where it comes up short. 
Investing
Capital Budgeting: Which is Better, IRR or NPV?
Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense. 
Markets
Fed's Discount Rate
The Federal discount rate is the amount of interest a central bank charges private banks for shortterm loans. 
Investing
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock. 
Managing Wealth
Finding A Discount On Your Next Bond Investment
Discount rates have nothing to do with buying things on sale. Rather, it helps you figure out how much to pay today for a bond or cash flow in the future. 
Investing
Evaluate Stock Price With ReverseEngineering DCF
This is a more accurate method to use when trying to find a target price for a stock. 
Investing
Taking Stock Of Discounted Cash Flow
Learn how and why investors are using cash flowbased analysis to make judgments about company performance. 
Personal Finance
Get Sale Prices On Healthcare With Discount Plans
Medical discount plans can help the uninsured or underinsured afford better healthcare.

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