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