Capital adequacy and Discount factor: Difference between pages
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1. ' | '''1.''' | ||
(DF). | |||
The number less than one which 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)<SUP>-n</SUP> | |||
Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB> | |||
For example | Where: | ||
n = number of periods. | |||
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> | |||
= 1.06<sup>-1</sup> | |||
= 0.9434. | |||
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%. | |||
The number of periods delay increases to 2. | |||
Discount factor = (1 + r)<sup>-n</sup> | |||
= 1.06<sup>-2</sup> | |||
= 0.8890. | |||
''(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)'' | |||
'''2.''' | |||
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. | |||
== See also == | == See also == | ||
* [[ | * [[Annuity factor]] | ||
* [[ | * [[Certificate in Treasury Fundamentals]] | ||
* [[ | * [[Certificate in Treasury]] | ||
* [[ | * [[CertFMM]] | ||
* [[ | * [[Compounding effect]] | ||
* [[ | * [[Compounding factor]] | ||
* [[ | * [[Day count conventions]] | ||
* [[ | * [[Factors]] | ||
* [[ | * [[Present value]] | ||
Revision as of 07:29, 8 October 2016
1.
(DF).
The number less than one which 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
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.
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.
