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)
“Before anything else [Numa] decided that he must instill in his subjects the fear of the gods, this being the most effective measure with an ignorant, and at that time uncultured, people.”
—Titus Livius (Livy)
“Don’t discount our powers;
We have made a pass
At the infinite,”
—Robert Frost (1874–1963)
“Strange that the vanity which accompanies beauty—excusable, perhaps, when there is such great beauty, or at any rate understandable—should persist after the beauty was gone.”
—Mary A. [Elizabeth, Countess Von] Arnim (1866–1941)