imported>Doug Williamson |
imported>Doug Williamson |
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| 1. ''Short-term markets.''
| | A limited company listed on a stock exchange whose sole aim is to invest in securities issued by other entities. |
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| In short-term financial markets, 'discount rate' means the quoted market rate for traded instruments quoted at a discount.
| | Unlike an investment trust, there is no limitation on the number of shares that can be issued (it is an open-ended structure). |
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| The market discount rate is quoted based on a percentage of the ''maturity amount''.
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| | The value of the shares is determined by the OEIC’s underlying assets; however, there is no bid-offer spread. |
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| <span style="color:#4B0082">'''Example 1: Discount rate calculation'''</span>
| | OEICs can be the underlying structure for a single fund or the umbrella fund for a family of sub-funds. |
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| The maturity amount for an investment is £10m.
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| The gain for the single period from the start to the final maturity is £2m.
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| The periodic discount rate (d) is:
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| (d) = Gain / End amount
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| = 2 / 10
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| = '''20%'''
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| In the US the market, discount rate is sometimes known as the ''discount yield''.
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| This is different from a [[yield]] or interest rate, which is conventionally quoted based on a percentage of the ''starting amount''.
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| <span style="color:#4B0082">'''Example 2: Yield calculation'''</span>
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| The starting amount for an investment is £8m.
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| The gain for the single period from the start to the final maturity is £2m.
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| The periodic yield (r) is:
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| (r) = Gain / Start amount
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| = 2 / 8
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| = '''25%'''
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| Notice that the discount rate and the yield calculated above both relate to exactly the same deal.
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| £8m is invested now, and £10m is repaid at the end of one period.
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| The discount rate of 20% and the yield of 25% both summarise the same deal, using different conventional bases.
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| 2. ''Cost of capital.''
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| The term 'discount rate' is used in certain other contexts as a synonym the the [[cost of capital]].
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| In these contexts, discount rate means the yield used to calculate [[discount factor]]s and present values.
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| 3. ''Pensions.''
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| In the field of pensions, discount rate means the rate used to discount future liabilities of a Defined benefit pension scheme in order to calculate the present value of the liabilities, often for the purpose of comparing them with the market value of the scheme’s assets.
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| Historically it was common to use the blended rate of investment return expected on the actual assets in the scheme, but typically now a market rate is used, such as the government bond or AA corporate bond yield for a fixed income security with a similar duration to that of the underlying liabilities.
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| 4. ''Central banking.''
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| In US central banking, the term 'discount rate' means the interest rate that member banks pay the Federal Reserve when the banks use securities as collateral.
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| The discount rate acts as a benchmark for interest rates issued.
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| Other central banks also have similar discount rates.
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| == See also == | | == See also == |
| * [[Cost of capital]] | | * [[Bid-offer spread]] |
| * [[Discount]] | | * [[Investment]] |
| * [[Discount basis]] | | * [[Investment company]] |
| * [[Discount instruments]] | | * [[Investment trust]] |
| * [[Discounted cash flow]] | | * [[Security]] |
| * [[DR]] | | * [[Undertaking for collective investments in transferable securities]] |
| * [[Interest rate]] | | * [[Unit trust]] |
| * [[Monetary policy]]
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| * [[Nominal annual discount rate]]
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| * [[Periodic discount rate]]
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| * [[Periodic rate]]
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| * [[Yield]]
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| ===Other links===
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| [http://www.treasurers.org/node/8837 Students: Triumph with timelines, The Treasurer, March 2013]
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| | [[Category:Accounting,_tax_and_regulation]] |
| | [[Category:The_business_context]] |
| [[Category:Corporate_finance]] | | [[Category:Corporate_finance]] |
| | [[Category:Investment]] |
| | [[Category:Long_term_funding]] |
| | [[Category:Identify_and_assess_risks]] |
| | [[Category:Manage_risks]] |
| | [[Category:Risk_frameworks]] |
| | [[Category:Risk_reporting]] |
| | [[Category:Financial_products_and_markets]] |
