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Definition of discount ratediscount ratethe 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. Discount rateThe interest rate that the Federal Reserve charges a bank to borrow funds when a bank is Discount RateThe rate of interest used to calculate the present value of a stream discount ratethe rate of return used to discount future cash discount rateInterest rate used to compute present values of future cash flows. Discount RateThe interest rate at which the Fed is prepared to loan reserves to commercial banks. Discount RateA rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
Related Terms:risk-adjusted discount rate methoda 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 log size modelAbrams’ model to calculate discount rates as a function of the logarithm of the value of the firm. PV (present value of cash flows)the value in today’s dollars of cash flows that occur in different time periods. QMDM (quantitative marketability discount model)model for calculating DLOM for minority interests r the discount rate All equity rateThe discount rate that reflects only the business risks of a project and abstracts from the Basic IRR ruleAccept the project if IRR is greater than the discount rate; reject the project is lower than the Constant-growth modelAlso called the Gordon-Shapiro model, an application of the dividend discount Cost of limited partner capitalThe discount rate that equates the after-tax inflows with outflows for capital Internal rate of returnDollar-weighted rate of return. discount rate at which net present value (NPV) Market capitalization rateExpected return on a security. The market-consensus estimate of the appropriate NPV profileA graph of NPV as a function of the discount rate. 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. internal rate of return (IRR)The precise discount rate that makes the present value (PV)This amount is calculated by discounting the future weighted-average cost of capitalWeighted 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 reinvestment assumptionan 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 Discount curveThe 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. Discount WindowThe Federal Reserve facility at which reserves are loaned to banks at the discount rate. Capitalization RateA discount rate used to find the present value of a series of future cash receipts. Sometimes called discount rate. Cost of CapitalThe 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 discountthe 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. Accelerated depreciationAny 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 strategyA 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 returnMoney after-tax rate of return minus the inflation rate. Amortizing interest rate swapSwap 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 returnArithmetic 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 rateTaxes as a fraction of income; total taxes divided by total taxable income. Bank discount basisA convention used for quoting bids and offers for treasury bills in terms of annualized Barbell strategyA strategy in which the maturities of the securities included in the portfolio are concentrated Base interest rateRelated: Benchmark interest rate. Basic business strategiesKey strategies a firm intends to pursue in carrying out its business plan. Benchmark interest rateAlso called the base interest rate, it is the minimum interest rate investors will Break-even payment rateThe prepayment rate of a MBS coupon that will produce the same CFY as that of Break-even tax rateThe tax rate at which a party to a prospective transaction is indifferent between entering Broker loan rateRelated: Call money rate. Bullet strategyA strategy in which a portfolio is constructed so that the maturities of its securities are highly Buy-and-hold strategyA passive investment strategy with no active buying and selling of stocks from the Call money rateAlso called the broker loan rate , the interest rate that banks charge brokers to finance Cash discountAn incentive offered to purchasers of a firm's product for payment within a specified time Combination strategyA strategy in which a put and with the same strike price and expiration are either both ConglomerateA firm engaged in two or more unrelated businesses. Conglomerate mergerA merger involving two or more firms that are in unrelated businesses. Corporate acquisitionThe acquisition of one firm by anther firm. Corporate bondsDebt obligations issued by corporations. Corporate charterA legal document creating a corporation. Corporate financeOne of the three areas of the discipline of finance. It deals with the operation of the firm Corporate financial managementThe application of financial principals within a corporation to create and Corporate financial planningFinancial planning conducted by a firm that encompasses preparation of both Corporate processing floatThe time that elapses between receipt of payment from a customer and the Corporate tax viewThe argument that double (corporate and individual) taxation of equity returns makes Corporate taxable equivalentrate of return required on a par bond to produce the same after-tax yield to Coupon rateIn bonds, notes or other fixed income securities, the stated percentage rate of interest, usually Covered call writing strategyA strategy that involves writing a call option on securities that the investor Covered or hedge option strategiesStrategies that involve a position in an option as well as a position in the Crediting rateThe interest rate offered on an investment type insurance policy. Cross ratesThe exchange rate between two currencies expressed as the ratio of two foreign exchange rates Crossover rateThe return at which two alternative projects have the same net present value. Current rate methodUnder this currency translation method, all foreign currency balance-sheet and income Dedication strategyRefers to multi-period cash flow matching. Deep-discount bondA bond issued with a very low coupon or no coupon and selling at a price far below par DiscountReferring to the selling price of a bond, a price below its par value. Related: premium. Discount bondDebt sold for less than its principal value. If a discount bond pays no interest, it is called a Discount factorPresent value of $1 received at a stated future date. Discount periodThe period during which a customer can deduct the discount from the net amount of the bill Discount securitiesNon-interest-bearing money market instruments that are issued at a discount and Discount windowFacility provided by the Fed enabling member banks to borrow reserves against collateral Discounted basisSelling 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 ruleAn investment decision rule in which the cash flows are discounted at an DiscountingCalculating 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 Dividend rateThe fixed or floating rate paid on preferred stock based on par value. Documented discount notesCommercial paper backed by normal bank lines plus a letter of credit from a Dollar-weighted rate of returnAlso called the internal rate of return, the interest rate that will make the Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of Effective rateA measure of the time value of money that fully reflects the effects of compounding. Equilibrium rate of interestThe interest rate that clears the market. Also called the market-clearing interest Exchange rateThe 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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