Discount factor and Pip: Difference between pages

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''Financial maths.''
1.  


'''1.'''
The most junior digit in a foreign currency quotation.


(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:
2.


PV = DF x future cashflow.
More generally, a minimum price movement for any quoted instrument or asset.
 
 
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>
 
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.'''
 
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.




== See also ==
== See also ==
* [[Annuity factor]]
* [[Basis point]]
* [[Certificate in Treasury Fundamentals]]
* [[Certificate in Treasury]]
* [[Compounding effect]]
* [[Compounding factor]]
* [[Cumulative Discount Factor]]
* [[Day count conventions]]
* [[Discount]]
* [[Discounted cash flow]]
* [[Expected credit loss]]
* [[Factors]]
* [[Present value]]
 
[[Category:Cash_management]]
[[Category:Liquidity_management]]

Revision as of 13:30, 21 August 2013

1.

The most junior digit in a foreign currency quotation.


2.

More generally, a minimum price movement for any quoted instrument or asset.


See also