discount rate

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Related to discount rate: Federal funds rate

Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings. In context of NPV or PV calculations, the discount rate is the annual percentage applied. In the context of project financing, the discount rate is often the all-in interest rate or the interest rate plus margin.

Discount Rate

The interest rate at which the Federal Reserve makes short-term loans to member banks. The discount rate is an indicator of the direction in which the Federal Reserve is trying to push the broader economy. In general, a low interest rate indicates that it is trying to promote growth by making liquidity easily available, and a high interest rate shows that the Fed is concerned about inflationary pressures on the economy and trying to reduce the amount of money in the economy. Along with the sale of Treasury securities and the determining of the fed funds rate, setting the discount rate is one of the primary ways the Federal Reserve sets the monetary policy of the United States.

discount rate

1. The interest rate charged by the Federal Reserve on loans to its member banks. A change in this rate is viewed as a strong indicator of Fed policy with respect to future changes in the money supply and market interest rates. Generally, a rise in the discount rate signals increasing interest rates in the money and capital markets.
2. The rate at which an investment's revenues and costs are discounted in order to calculate its present value.

Discount rate.

The discount rate is the interest rate the Federal Reserve charges on loans it makes to banks and other financial institutions.

The discount rate becomes the base interest rate for most consumer borrowing as well. That's because a bank generally uses the discount rate as a benchmark for the interest it charges on the loans it makes.

For example, when the discount rate increases, the interest rate that lenders charge on home mortgages and other loans increases. And when the discount rate is lowered, the cost of consumer borrowing eventually decreases as well.

The term discount rate also applies to discounted instruments like US Treasury bills. In this case, the rate is used to identify the interest you will earn if you purchase at issue, hold the bill to maturity, and receive face value at maturity.

The interest is the difference between what you pay to purchase the bills and the amount you are repaid.

discount rate

the INTEREST RATE at which future cash inflows and cash outflows associated with an INVESTMENT project are discounted in order to allow for the timing of these cash flows. The discount rate used by firms in evaluating the desirability of investments is frequently based upon the average COST OF CAPITAL to the firm. See DISCOUNTED CASH FLOW.

discount rate

the INTEREST RATE at which the streams of cash inflows and outflows associated with an INVESTMENT project are to be discounted. For private-sector projects, the discount rate is frequently based upon the weighted-average COST OF CAPITAL to the firm, with the interest cost of each form of finance (long-term loans, overdrafts, equity etc.) being weighted by the proportion that each form of finance contributes to total company finances.

The discount rate for public-sector investment projects involves more complex considerations. It can be argued that, while individuals have a limited lifespan and so will not look too many years ahead for returns on investment, society continues indefinitely as some individuals die and are replaced by others being born, so society will tend to look further ahead for returns. This disparity between private time preference and social time preference means that society will tend to discount the future less heavily than the individual and would favour a lower discount rate. On the other hand, opportunity-cost considerations may make it difficult for society to apply a lower, less stringent, discount rate to public sector projects than is applied in the private sector. Otherwise, inferior projects in the public sector could divert funds away from superior projects in the private sector. The social opportunity-cost discount rate may well therefore need to be similar to the private sector rate. Finally, the government borrowing rate is a risk-free interest rate since it entails little risk of default in repaying the loan, while private sector rates entail a risk premium, so that the government borrowing rate may be too low in opportunity-cost terms.

In most public investment appraisals the discount rate applied has tended to follow current prevailing private-sector interest rates. See INVESTMENT APPRAISAL, DISCOUNTED CASH FLOW, PAYBACK PERIOD, COST-BENEFIT ANALYSIS, TIME PREFERENCE.

discount rate

The rate at which the Federal Reserve loans money to lenders to cover short-term cash needs, usually for overnight loans. Increases or decreases in the discount rate almost always signal similar increases or decreases in bank loan rates to customers, even though the two are not directly tied to each other.

References in periodicals archive ?
However, consumers' actual discount rates are not homogenous, either across the population or across purchase types.
Both the take up of IDA programs and savings within the program are likely to be affected by an individual's discount rate, an issue which has not yet received attention in the IDA literature.
They stressed that in the next monetary policy review, SBP should reduce discount rate to single digit level in the larger interest of the economy.
The next paper, "Time preference, the cost of capital and PPPs," by Michael Spackman, delves into the theoretical basis for different discount rates, together with a discussion of the strengths and weaknesses of each discount rate.
Another institution we served had run into trouble by focusing entirely on achieving overly ambitious enrollment goals--what we call "chasing prestige"--and had let the discount rate run too high.
Although the Fed established three separate rates in place of the original Discount Rate, the Arkansas Supreme Court determined that the purpose behind Amendment 60 was to clarify the rate of allowable interest in Arkansas, not to abolish usury altogether.
If the discount rate is derived from public market data, more often than not it is reflective of a minority interest and the value derived would be a minority interest.
If expected future payments for termination benefits are discounted, the discount rate should be determined by giving consideration to the estimated yield, over the period of time the benefits are to be provided, on the investments that are expected to be used to finance the payment of benefits, (5) with consideration given to the nature and mix of current and expected investments.
Third, the discount rate will become an improved safety valve for releasing significant market pressures.
The discount rate is a risk-adjusted rate of return representative of rates demanded by life settlement buyers.
If they do, a fixed rate could offer the best value for money, but if not, a discount rate might be more worthwhile.
Another attempt is made to justify the discount rate conclusions in the first full paragraph of column two, page 140, with the assertion ".