Discount factor: Difference between revisions
imported>Doug Williamson (Clarify that 'yield' and 'cost of capital' are equivalent in this context.) |
imported>Doug Williamson (Add links.) |
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''Financial maths.'' | |||
'''1.''' | |||
(DF). | |||
A discount factor is a number less than one, that we multiply a single future cash flow by, to work out its present value as: | |||
PV = DF x future cashflow. | PV = DF x future cashflow. | ||
The periodic discount factor is calculated from the periodic yield as: | The periodic discount factor is calculated from the periodic [[yield]] as: | ||
DF = (1 + periodic yield)<SUP>-n</SUP> | |||
''(= 1 / (1 + periodic yield)<SUP>n</SUP>)'' | |||
Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB> | Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB> | ||
Where: | |||
n = number of periods. | |||
n = number of periods | |||
r = periodic yield (cost of capital). | r = periodic yield (or periodic cost of capital). | ||
''' | <span style="color:#4B0082">'''Example 1: Discount factor calculation'''</span> | ||
Periodic yield or cost of capital (r) = 6%. | |||
Number of periods in the total time under review (n) = 1. | |||
Discount factor = (1+r)<sup>-n</sup> | Discount factor = (1 + r)<sup>-n</sup> | ||
= 1.06<sup>-1</sup> | = 1.06<sup>-1</sup> | ||
= | = 0.9434. | ||
The greater the time delay, the smaller the Discount Factor. | The greater the time delay, the smaller the Discount Factor. | ||
<span style="color:#4B0082">'''Example 2: Increasing number of periods delay'''</span> | |||
Periodic yield or cost of capital = 6%. | |||
Discount factor = (1+r)<sup>-n</sup> | The number of periods delay increases to 2. | ||
Discount factor = (1 + r)<sup>-n</sup> | |||
= 1.06<sup>-2</sup> | = 1.06<sup>-2</sup> | ||
= | = 0.8890. | ||
''(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)'' | ''(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)'' | ||
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'''2.''' | '''2.''' | ||
Historically, the yield or cost of capital used for the purpose of calculating Discount Factors, as defined above. | |||
For example the 6% rate applied in definition 1. above. | For example the 6% rate applied in definition 1. above. | ||
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== See also == | == See also == | ||
* [[Annuity factor]] | * [[Annuity factor]] | ||
* [[ | * [[Certificate in Treasury Fundamentals]] | ||
* [[Certificate in Treasury]] | |||
* [[Compounding effect]] | |||
* [[Compounding factor]] | * [[Compounding factor]] | ||
* [[Cumulative Discount Factor]] | |||
* [[Day count conventions]] | |||
* [[Discount]] | |||
* [[Discounted cash flow]] | |||
* [[Expected credit loss]] | |||
* [[Factors]] | * [[Factors]] | ||
* [[Present value]] | * [[Present value]] | ||
[[Category:Cash_management]] | |||
[[Category:Liquidity_management]] | |||
Latest revision as of 00:03, 7 July 2022
Financial maths.
1.
(DF).
A discount factor is a number less than one, that we multiply a single future cash flow by, to work out its present value as:
PV = DF x future cashflow.
The periodic discount factor is calculated from the periodic yield as:
DF = (1 + periodic yield)-n
(= 1 / (1 + periodic yield)n)
Commonly abbreviated as DF(n,r) or DFn,r
Where:
n = number of periods.
r = periodic yield (or periodic cost of capital).
Example 1: Discount factor calculation
Periodic yield or cost of capital (r) = 6%.
Number of periods in the total time under review (n) = 1.
Discount factor = (1 + r)-n
= 1.06-1
= 0.9434.
The greater the time delay, the smaller the Discount Factor.
Example 2: Increasing number of periods delay
Periodic yield or cost of capital = 6%.
The number of periods delay increases to 2.
Discount factor = (1 + r)-n
= 1.06-2
= 0.8890.
(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)
2.
Historically, the yield or cost of capital used for the purpose of calculating Discount Factors, as defined above.
For example the 6% rate applied in definition 1. above.
