The discount rate is the interest rate the Federal Reserve charges on loans it makes to banks and other financial institutions.
A simple explanation of the discount rate used in DCF analysis is as follows. Let's say you expect $1,000 in one year. To determine the present value of this $1,000 (what it is worth to you today), you would need to discount it by a particular interest rate. The Fed’s Discount Rate is an administered rate set by the Federal Reserve Banks, rather than a market rate of interest. Use of the Fed’s discount window soared in late 2007 and 2008, as financial conditions deteriorated sharply and the Federal Reserve took steps to provide liquidity to the financial system. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. To determine the present value of this $1,000 (what it is worth to you today), you would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the $1,000 in a year's time would be the equivalent of $909.09 to you today (1,000/[1.00 + 0.10]). The discount rate is the rate of return used in a discounted cash flow analysis to determine the present value of future cash flows. In a discounted cash flow analysis, the sum of all future cash flows (C) over some holding period (N), is discounted back to the present using a rate of return (r). The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate. The Fed actually controls this rate directly, but this fact does not really help in policy implementation, since banks can also find such funds elsewhere. also called Federal Reserve Discount Rate. 2. Details of the Discount Rate. The discount rate is typically higher than the fed funds rate, so it is used as a last resort by banks that need to borrow. For example, in early 2012 the primary discount rate was 0.75%, while the fed funds rate was targeted in a range of 0% to 0.25%. The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate is the interest rate the Federal Reserve charges on loans it makes to banks and other financial institutions. The discount rate becomes the base interest rate for most consumer borrowing as well.
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