Default and Discount factor: Difference between pages

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1. ''Contract.''
''Financial maths.''


Failure to honour the terms of an agreement.
'''1.'''


For example, failure to honour the terms of a loan agreement, or an obligation under a futures contract.
(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. ''Borrowing and lending - documentation.''
PV = DF x future cashflow.


In borrowing and lending, default clauses are the part of the documentation that protect the investor (lender).


Accordingly default clauses are incorporated into loan agreements and bond indentures.
The periodic discount factor is calculated from the periodic [[yield]] as:


DF = (1 + periodic yield)<SUP>-n</SUP>


Examples of default by a borrower include failure to pay interest or principal on time, and breaching a covenant.


Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB>


3. ''Other obligations - tax compliance.''
Where:


More broadly, any failure to fulfil an obligation.
n = number of periods.


For example, late delivery of a tax return under the applicable tax compliance regime.
r = periodic yield (or periodic cost of capital).




4. ''Systems design - behavioural economics - decision making''.


'By default', or a 'default position', means a choice or determination that is made, when no other positive decision or initiative has been taken.
<span style="color:#4B0082">'''Example 1: Discount factor calculation'''</span>


Periodic yield or cost of capital (r) = 6%.


:<span style="color:#4B0082">'''''Taxation in Qatar'''''</span>
Number of periods in the total time under review (n) = 1.


:"There are two separate tax regimes in operation in Qatar and an entity is under the remit of only one regime.


:By default an entity is under the State of Qatar regime.
Discount factor = (1 + r)<sup>-n</sup>


:Alternatively, an entity is under the remit of the Qatar Financial Centre (QFC) regime if the entity is licensed with the QFC."
= 1.06<sup>-1</sup>


:''Qatar - the Treasurer's Wiki''
= 0.9434.




Another example of a default position is the cognitive ''status quo bias'' to favour pre-existing conditions or choices, whatever they are.
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 ==
* [[Acceleration]]
* [[Annuity factor]]
* [[Bond]]
* [[Certificate in Treasury Fundamentals]]
* [[Bond indenture]]
* [[Certificate in Treasury]]
* [[Breach of covenant]]
* [[Compounding effect]]
* [[Covenant]]
* [[Compounding factor]]
* [[Credit event]]
* [[Cumulative Discount Factor]]
* [[Cross default]]
* [[Day count conventions]]
* [[Debt distress]]
* [[Expected credit loss]]
* [[Default bias]]
* [[Factors]]
* [[Default netting]]
* [[Present value]]
* [[Default fund]]
* [[Default surcharge]]
* [[Defaulting lender]]
* [[Deletion]]
* [[Entity]]
* [[Event of default]]
* [[Exposure At Default]]
* [[Finance party default]]
* [[Financial covenant]]
* [[Forbearance]]
* [[Forward contract]]
* [[Futures contract]]
* [[Grace period]]
* [[Interest]]
* [[Lehman provisions]]
* [[Loss Given Default]]
* [[Loan agreement]]
* [[Materiality]]
* [[Merton distance-to-default]]
* [[Non-performing loan]]
* [[Obligation]]
* [[Principal]]
* [[Probability of Default]]
* [[Qatar]]
* [[Qatar Financial Centre]]
* [[Regime]]
* [[Risk]]
* [[Speculation]]
* [[Tax compliance]]
* [[Tax return]]
* [[Variation margin]]
* [[Waiver]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Cash_management]]
[[Category:The_business_context]]
[[Category:Liquidity_management]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]
[[Category:Financial_products_and_markets]]

Revision as of 14:31, 26 June 2019

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


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.


See also

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