imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| ''Financial maths.''
| | The European Venues and Intermediaries Association, formerly known as the Wholesale Markets Brokers Association (WMBA). |
|
| |
|
| '''1.'''
| |
|
| |
|
| (DF).
| | ==See also== |
| | | * [[European Venues and Intermediaries Association]] |
| 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)<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 == | |
| * [[Annuity factor]] | |
| * [[Certificate in Treasury Fundamentals]]
| |
| * [[Certificate in Treasury]]
| |
| * [[Compounding effect]]
| |
| * [[Compounding factor]]
| |
| * [[Cumulative Discount Factor]]
| |
| * [[Day count conventions]]
| |
| * [[Expected credit loss]]
| |
| * [[Factors]]
| |
| * [[Present value]]
| |
| | |
| [[Category:Cash_management]]
| |
| [[Category:Liquidity_management]]
| |
