Financial Terms ADF (annuity discount factor)

# Definition of ADF (annuity discount factor)

the present value of a finite stream of cash flows for every beginning \$1 of cash flow.

# Related Terms:

## DLOC (discount for lack of control)

an amount or percentage deducted from a pro rata share of the value of 100% of an equity interest in a business, to reflect the absence of some or all of the powers of control.

## DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.

## discount rate

the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

## fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the adf, Gordon model, or present value factor.

## PPF (periodic perpetuity factor)

a generalization formula invented by Abrams that is the present value of regular but noncontiguous cash flows that have constant growth to perpetuity.

## QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

## Accretion (of a discount)

In portfolio accounting, a straight-line accumulation of capital gains on discount
bond in anticipation of receipt of par at maturity.

## Amortization factor

The pool factor implied by the scheduled amortization assuming no prepayemts.

## Annuity

A regular periodic payment made by an insurance company to a policyholder for a specified period
of time.

## Annuity due

An annuity with n payments, wherein the first payment is made at time t = 0 and the last
payment is made at time t = n - 1.

## Annuity factor

Present value of \$1 paid for each of t periods.

## Annuity in arrears

An annuity with a first payment on full period hence, rather than immediately.

## Bank discount basis

A convention used for quoting bids and offers for treasury bills in terms of annualized
yield , based on a 360-day year.

## Cash discount

An incentive offered to purchasers of a firm's product for payment within a specified time
period, such as ten days.

## Conversion factors

Rules set by the Chicago Board of Trade for determining the invoice price of each
acceptable deliverable Treasury issue against the Treasury Bond futures contract.

## Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par
value. When the bond has no coupon, it's called a zero coupon bond.

## Deferred nominal life annuity

A monthly fixed-dollar payment beginning at retirement age. It is nominal
because the payment is fixed in dollar amount at any particular time, up to and including retirement.

## Discount

Referring to the selling price of a bond, a price below its par value. Related: premium.

## Discount bond

Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
zero coupon bond.

## Discount factor

Present value of \$1 received at a stated future date.

## Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

## 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.

## Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.

## Discount window

Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.

## Discounted basis

Selling something on a discounted basis is selling below what its value will be at maturity,
so that the difference makes up all or part of the interest.

## Discounted cash flow (DCF)

Future cash flows multiplied by discount factors to obtain present values.

## Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

## Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

## Discounting

Calculating the present value of a future amount. The process is opposite to compounding.

## Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

## Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

## Equivalent annual annuity

The equivalent amount per year for some number of years that has a present
value equal to a given amount.

## Factor

A financial institution that buys a firm's accounts receivables and collects the debt.

## Factor analysis

A statistical procedure that seeks to explain a certain phenomenon, such as the return on a
common stock, in terms of the behavior of a set of predictive factors.

## Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

## Factor portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of
zero on any other factors.

## Factoring

Sale of a firm's accounts receivable to a financial institution known as a factor.

## Forward discount

A currency trades at a forward discount when its forward price is lower than its spot price.

## Maturity factoring

factoring arrangement that provides collection and insurance of accounts receivable.

## Multifactor CAPM

A version of the capital asset pricing model derived by Merton that includes extramarket
sources of risk referred to as factor.

## Net benefit to leverage factor

A linear approximation of a factor, T*, that enables one to operationalize the
total impact of leverage on firm value in the capital market imperfections view of capital structure.

## Normal annuity form

The manner in which retirement benefits are paid out.

## Old-line factoring

factoring arrangement that provides collection, insurance, and finance for accounts receivable.

## One-factor APT

A special case of the arbitrage pricing theory that is derived from the one-factor model by
using diversification and arbitrage. It shows the expected return on any risky asset is a linear function of a
single factor.

## Original issue discount debt (OID debt)

Debt that is initially offered at a price below par.

## Pool factor

The outstanding principal balance divided by the original principal balance with the result
expressed as a decimal. Pool factors are published monthly by the Bond Buyer newspaper for Ginnie Mae,
Fannie Mae, and Freddie Mac(Federal Home Loan Mortgage Corporation) MBSs.

## Present value factor

factor used to calculate an estimate of the present value of an amount to be received in
a future period.

## Pure-discount bond

A bond that will make only one payment of principal and interest. Also called a zerocoupon
bond or a single-payment bond.

## RAMs (Reverse-annuity mortgages)

Mortgages in which the bank makes a loan for an amount equal to a
percentage of the appraisal value of the home. The loan is then paid to the homeowner in the form of an
annuity.

## Reported factor

The pool factor as reported by the bond buyer for a given amortization period.

## Single factor model

A model of security returns that acknowledges only one common factor.
See: factor model.

An insurance policy bought by the sponsor of a pension plan for a single
premium. In return, the insurance company agrees to make lifelong payments to the employee (the
policyholder) when that employee retires.

## Two-factor model

Black's zero-beta version of the capital asset pricing model.

## Discounted cash flow (DCF)

A method of investment appraisal that discounts future cash flows to present value using a discount rate, which is the risk-adjusted cost of capital.

## Limiting factor

The production resource that, as a result of scarce resources, limits the production of goods
or services, i.e. a bottleneck.

## Purchase discounts

A contra account that reduces purchases by the amount of the discounts taken for early payment.

## Sales discounts

A contra account that offsets revenue. It represents the amount of the discounts for early payment allowed on sales.

## discounted cash flow (DCF)

Refers to a capital investment analysis technique
that discounts, or scales down, the future cash returns from an
investment based on the cost-of-capital rate for the business. In essence,
each future return is downsized to take into account the cost of capital
from the start of the investment until the future point in time when the
return is received. Present value (PV) is the amount resulting from discounting
the future returns. Present value is subtracted from the entry
cost of the investment to determine net present value (NPV). The net
present value is positive if the present value is more than the entry cost,
which signals that the investment would earn more than the cost-ofcapital
rate. If the entry cost is more than the present value, the net
present value is negative, which means that the investment would earn
less than the businessâ€™s cost-of-capital rate.

## Annuity

A series of payments or deposits of equal size spaced evenly over
a specified period of time

## Annuity Due

annuity where the payments are to be made at the beginning of
each period

## Continuous Discounting

The process of calculating the present value of a stream of future
cash flows by discounting over a continuous period of time

## Discount Rate

The rate of interest used to calculate the present value of a stream
of future cash flows

## Discounting

The process of calculating the present value of a stream of future
cash flows

## Ordinary Annuity

An annuity where the payments are made at the end of each
period

a price concession made under competitive pressure (real or imagined) that does not relate to quantity purchased

## annuity due

a series of equal cash flows being received or paid at the beginning of a period

## critical success factors (CSF)

any item (such as quality, customer
service, efficiency, cost control, or responsiveness
to change) so important that, without it, the organization
would cease to exist

## discounting

the process of reducing future cash flows to present value amounts

## discount rate

the rate of return used to discount future cash
flows to their present value amounts; it should equal or
exceed an organizationâ€™s weighted average cost of capital

## ordinary annuity

a series of equal cash flows being received
or paid at the end of a period

a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk

## Annuity

A series of payments over a period of time. The payments are usually
in equal amounts and usually at regular intervals such as quarterly,
semi-annually, or annually.

## Discount curve

The curve of discount rates vs. maturity dates for bonds.

## Discounted cash flow

A technique that determines the present value of future cash
flows by applying a rate to each periodic cash flow that is derived from the cost of
capital. Multiplying this discount by each future cash flow results in an amount that
is the present value of all the future cash flows.

## Factoring

The sale of accounts receivable to a third party, with the third party bearing
the risk of loss if the accounts receivable cannot be collected.

All the costs incurred during the manufacturing process, minus the
costs of direct labor and materials.

## Sales discount

A reduction in the price of a product or service that is offered by the
seller in exchange for early payment by the buyer.

## annuity

Equally spaced level stream of cash flows.

## annuity due

Level stream of cash flows starting immediately.

## annuity factor

Present value of an annuity of \$1 per period.

## constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

## discount factor

Present value of a \$1 future payment.

## discount rate

Interest rate used to compute present values of future cash flows.

## dividend discount model

Computation of todayâ€™s stock price which states that share value equals the present value of all expected future dividends.

## Discount

The percentage amount at which bonds sell below their par value. Also the percentage amount at which a currency sells on the forward market below its current rate on the spot market.

## Discount Bond

A bond with no coupons, priced below its face value; the return on this bond comes from the difference between its face value and its current price.

## Discounting

Calculating the present value of a future payment.

## Discount Rate

The interest rate at which the Fed is prepared to loan reserves to commercial banks.

## Discount Window

The Federal Reserve facility at which reserves are loaned to banks at the discount rate.

## Factor of Production

A resource used to produce a good or service. The main macroeconomic factors of production are capital and labor.

## Individual Retirement Annuity

An IRA comprised of an annuity that is managed
through and paid out by a life insurance company.

## Factoring

The discounting, or sale at a discount, of receivables on a nonrecourse, notification
basis. The purchaser of the accounts receivable, the factor, assumes full risk of collection and
credit losses, without recourse to the firms discounting the receivables. Customers are notified to
remit directly to the factor.

## Scrap factor

An anticipated loss percentage included in the bill of material and
used to order extra materials for a production run, in anticipation of scrap losses.

## Shrinkage factor

The expected loss of some proportion of an item during the
production process, expressed as a percentage.

## Annuity

A contract which provides an income for a specified period of time, such as a certain number of years or for life. An annuity is like a life insurance policy in reverse. The purchaser gives the life insurance company a lump sum of money and the life insurance company pays the purchaser a regular income, usually monthly.

## Back To Back Annuity

This term refers to the simultaneous issue of a life annuity with a non-guaranteed period and a guaranteed life insurance policy [usually whole life or term to 100]. The face value of the life insurance would be the same amount that was used to purchase the annuity. This combination of life annuity providing the highest payout of all types of annuities, along with a guaranteed life insurance policy allowed an uninsurable person to convert his/her RRSP into the best choice of annuity and guarantee that upon his/her death, the full value of the annuity would be paid tax free through the life insurance policy to his family members. However, in the early 1990's, the Federal tax authorities put a stop to the issuing of standard life rates to rated or uninsurable applicants. Insuring a life annuity in this manner is still an excellent way to provide guaranteed tax free funds to family members but the application for the annuity and the application for the life insurance are separate transactions and today, most likely conducted through two different insurance companies so that there is no suspicion of preferential treatment given to the life insurance application.

## Deferred Annuity

An annuity providing for income payments to commence at a specified future time.

## Non-Smoker Discount

In October 1996 it was announced in the international news that scientists had finally located the link between cigarette smoking and lung cancer. In the early 1980's, some Canadian Life Insurance Companies had already started recognizing that non-smokers had a better life expectancy than smokers so commenced offering premium discounts for life insurance to new applicants who have been non-smokers for at least 12 months before applying for coverage. Today, most life insurance companies offer these discounts.
Savings to non-smokers can be up to 50% of regular premium depending on age and insurance company. Most life insurance companies offering non-smoker rates insist that the person applying for coverage have abstained from any form of tobacco or marijuana for at least twelve months, some companies insist on longer periods, up to 15 years.
Tobacco use is generally considered to be cigarettes, cigarillos, cigars, pipes, chewing tobacco, nicorette gum, snuff, marijuana and nicotine patches. In addition to these, if anyone tests positive to cotinine, a by-product of nicotine, they are also considered a smoker. There are some insurance companies which allow moderate or occasional use of cigars, cigarillos or pipes as acceptable for non-smoker status. Experienced brokers are aware of how to locate these insurance companies and save you money.
Special care should be taken by applicants for coverage who qualify for non-smoker rates by virtue of having ceased a smoking habit for the required period before application, but for some reason, fall back into the smoking habit some time after obtaining coverage. While contractually, the insurance company is still bound to a non-smoking rate, the facts of the applicant's smoking hiatus may become vague over the subsequent years of the resumed habit and at time of death claim, the insurance company may decide to contest the original non-smoking declaration. The consequence is not simply a need to back pay the difference between non-smoker and smoker rates but in reality the possibility of denial of death claim. It is therefore, important to advise the servicing broker as well as the insurance company of the change in smoking habits to make certain that sufficient evidence is documented to track the non-smoking period.

## Discount Rate

A rate of return used to convert a monetary sum, payable or receivable in the future, into present value.