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:
“In soliciting donations from his flock, a preacher may promise eternal life in a celestial city whose streets are paved with gold, and that’s none of the law’s business. But if he promises an annual free stay in a luxury hotel on Earth, he’d better have the rooms available.”
—Unknown. Charlotte Observer (October 6, 1989)
“Society’s double behavioral standard for women and for men is, in fact, a more effective deterrent than economic discrimination because it is more insidious, less tangible. Economic disadvantages involve ascertainable amounts, but the very nature of societal value judgments makes them harder to define, their effects harder to relate.”
—Anne Tucker (b. 1945)
“Don’t discount our powers;
We have made a pass
At the infinite,”
—Robert Frost (1874–1963)
“Whoever thinks his friend more important than his country, I rate him nowhere.”
—Sophocles (497–406/5 B.C.)