Discount rate
The discount rate is (1) An interest rate used to bring future values into the present when considering the time value of money. (2) The interest rate the Federal Reserve (the Fed) charges to loan money to banks.
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Expanded Definition
Different investors calculate the discount rate differently. For example, Warren Buffett is said to use the yield on the 10-year US treasury bond + 5%. Other people calculate a discount rate using the weighted average cost of capital.
When determining a discount rate, some investors like to increase it for more risky securities, such as small cap stocks, where the future cash flows are more likely to be volatile.
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