Annual Effective Discount Rate
The annual effective discount rate is the annual interest divided by the capital including that interest, which is the interest rate divided by 100% plus the interest rate. It is the annual discount factor to be applied to the future cash flow, to find the discount, subtracted from a future value to find the value one year earlier.
For example, suppose there is a government bond that sells for $95 and pays $100 in a year's time. The discount rate according to the given definition is
The interest rate is calculated using 95 as its base:
For every annual effective interest rate, there is a corresponding annual effective discount rate, given by the following formula
or inversely,
where the approximations apply for small i and d; in fact i - d = id.
See also notation of interest rates.
Read more about this topic: Discount Rate
Famous quotes containing the words annual, effective, discount and/or rate:
“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it.... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
—Adam Smith (17231790)
“Watteau is no less an artist for having painted a fascia board while Sainsburys is no less effective a business for producing advertisements which entertain and educate instead of condescending and exploiting.”
—Stephen Bayley (b. 1951)
“Dont discount our powers;
We have made a pass
At the infinite,”
—Robert Frost (18741963)
“If I die prematurely at any rate I shall be saved from being bored to death at my own success.”
—Samuel Butler (18351902)