WHAT EXACTLY IS THE DISCOUNT RATE? - ProProfs Discuss
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What exactly is the discount rate?



Asked by Ruby, Last updated: Nov 22, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

The discount rate is the rate you use to discount future cash flows in order to determine the present value you should pay for the cash flow.for example, if i told you that i would pay you $107 in one year, how much would you discount that cash flow if you were expecting a rate of return of 7%?$107 / 1.07 = $100from this youve calculated that if you want a rate of return of 7% on your money and the cash flow is $107, youll want to pay $100. you can check this by adding 7% to $100. what if you decided you wanted a rate of return of 9%?$107 / 1.09 = $98.17from this youve calculated that if you want a rate of return of 9% on your money and the cash flow is $107, youll want to pay $98.17. you can check this by adding 9% to $98.17.the discount rate is given as part of the question when you are asked to calculate the present value of a bond. outside the course, if you wanted to use an appropriate discount rate to calculate the price of the bond, you can examine the yields on similar bonds in that trade in the market and figure out a rough idea of what discount rate to use based on what returns similar bonds are paying.
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