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:
“No annual training or muster of soldiery, no celebration with its scarfs and banners, could import into the town a hundredth part of the annual splendor of our October. We have only to set the trees, or let them stand, and Nature will find the colored drapery,—flags of all her nations, some of whose private signals hardly the botanist can read,—while we walk under the triumphal arches of the elms.”
—Henry David Thoreau (1817–1862)
“The general fact is that the most effective way of utilizing human energy is through an organized rivalry, which by specialization and social control is, at the same time, organized co-operation.”
—Charles Horton Cooley (1864–1929)
“Don’t discount our powers;
We have made a pass
At the infinite,”
—Robert Frost (1874–1963)
“As a novelist, I cannot occupy myself with “characters,” or at any rate central ones, who lack panache, in one or another sense, who would be incapable of a major action or a major passion, or who have not a touch of the ambiguity, the ultimate unaccountability, the enlarging mistiness of persons “in history.” History, as more austerely I now know it, is not romantic. But I am.”
—Elizabeth Bowen (1899–1973)