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Definition of 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.
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
The rate of interest used to calculate the present value of a stream
the rate of return used to discount future cash
Interest rate used to compute present values of future cash flows.
The interest rate at which the Fed is prepared to loan reserves to commercial banks.
A rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
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
Abrams’ model to calculate discount rates as a function of the logarithm of the value of the firm.
the value in today’s dollars of cash flows that occur in different time periods.
model for calculating DLOM for minority interests r the discount rate
The discount rate that reflects only the business risks of a project and abstracts from the
Accept the project if IRR is greater than the discount rate; reject the project is lower than the
Also called the Gordon-Shapiro model, an application of the dividend discount
The discount rate that equates the after-tax inflows with outflows for capital
Dollar-weighted rate of return. discount rate at which net present value (NPV)
Expected return on a security. The market-consensus estimate of the appropriate
A graph of NPV as a function of the discount rate.
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.
The precise discount rate that makes the
This amount is calculated by discounting the future
Weighted means that the proportions of
Internal Rate of Return (IRR)
The discount rate that equates the present value of the net cash
internal rate of return (IRR)
the expected or actual rate of
an assumption made about the rates of return that will be earned by intermediate cash flows from a capital project; NPV and PI assume reinvestment at the discount rate; IRR assumes reinvestment at the IRR
The curve of discount rates vs. maturity dates for bonds.
Internal rate of return
a. The average annual yield earned by an investment during the period held.
internal rate of return (IRR)
discount rate at which project NPV = 0.
The Federal Reserve facility at which reserves are loaned to banks at the discount rate.
A discount rate used to find the present value of a series of future cash receipts. Sometimes called discount rate.
Cost of Capital
The discount rate that should be used in the capital budgeting process.
ADF (annuity discount factor)
the present value of a finite stream of cash flows for every beginning $1 of cash flow.
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.
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.
Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.
Any depreciation method that produces larger deductions for depreciation in the
Accretion (of a discount)
In portfolio accounting, a straight-line accumulation of capital gains on discount
Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek a
Adjustable rate preferred stock (ARPS)
Publicly traded issues that may be collateralized by mortgages and MBSs.
After-tax real rate of return
Money after-tax rate of return minus the inflation rate.
Amortizing interest rate swap
Swap in which the principal or national amount rises (falls) as interest rates
Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example, a 5%
Arithmetic average (mean) rate of return
Arithmetic mean return.
Auction rate preferred stock (ARPS)
Floating rate preferred stock, the dividend on which is adjusted every
Average rate of return (ARR)
The ratio of the average cash inflow to the amount invested.
Average tax rate
Taxes as a fraction of income; total taxes divided by total taxable income.
Bank discount basis
A convention used for quoting bids and offers for treasury bills in terms of annualized
A strategy in which the maturities of the securities included in the portfolio are concentrated
Base interest rate
Related: Benchmark interest rate.
Basic business strategies
Key strategies a firm intends to pursue in carrying out its business plan.
Benchmark interest rate
Also called the base interest rate, it is the minimum interest rate investors will
Break-even payment rate
The prepayment rate of a MBS coupon that will produce the same CFY as that of
Break-even tax rate
The tax rate at which a party to a prospective transaction is indifferent between entering
Broker loan rate
Related: Call money rate.
A strategy in which a portfolio is constructed so that the maturities of its securities are highly
A passive investment strategy with no active buying and selling of stocks from the
Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance
An incentive offered to purchasers of a firm's product for payment within a specified time
A strategy in which a put and with the same strike price and expiration are either both
A firm engaged in two or more unrelated businesses.
A merger involving two or more firms that are in unrelated businesses.
The acquisition of one firm by anther firm.
Debt obligations issued by corporations.
A legal document creating a corporation.
One of the three areas of the discipline of finance. It deals with the operation of the firm
Corporate financial management
The application of financial principals within a corporation to create and
Corporate financial planning
Financial planning conducted by a firm that encompasses preparation of both
Corporate processing float
The time that elapses between receipt of payment from a customer and the
Corporate tax view
The argument that double (corporate and individual) taxation of equity returns makes
Corporate taxable equivalent
rate of return required on a par bond to produce the same after-tax yield to
In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
Covered call writing strategy
A strategy that involves writing a call option on securities that the investor
Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the
The interest rate offered on an investment type insurance policy.
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
The return at which two alternative projects have the same net present value.
Current rate method
Under this currency translation method, all foreign currency balance-sheet and income
Refers to multi-period cash flow matching.
A bond issued with a very low coupon or no coupon and selling at a price far below par
Referring to the selling price of a bond, a price below its par value. Related: premium.
Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
Present value of $1 received at a stated future date.
The period during which a customer can deduct the discount from the net amount of the bill
Non-interest-bearing money market instruments that are issued at a discount and
Facility provided by the Fed enabling member banks to borrow reserves against collateral
Selling something on a discounted basis is selling below what its value will be at maturity,
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
Discounted payback period rule
An investment decision rule in which the cash flows are discounted at an
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
The fixed or floating rate paid on preferred stock based on par value.
Documented discount notes
Commercial paper backed by normal bank lines plus a letter of credit from a
Dollar-weighted rate of return
Also called the internal rate of return, the interest rate that will make the
Effective annual interest rate
An annual measure of the time value of money that fully reflects the effects of
A measure of the time value of money that fully reflects the effects of compounding.
Equilibrium rate of interest
The interest rate that clears the market. Also called the market-clearing interest
The price of one country's currency expressed in another country's currency.
Exchange Rate Mechanism (ERM)
The methodology by which members of the EMS maintain their
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