imported>Doug Williamson |
imported>Doug Williamson |
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| (DR).
| | 1. ''Accounting''. |
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| 1. ''Cost of capital.''
| | Profit margin measures the surplus of revenues over relevant costs, often expressed as a percentage. |
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| 'Discount rate' is often used as a synonym for the [[cost of capital]].
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| In this context, discount rate is the generic name for the rate of interest at which the future cash flows of a proposed investment are discounted, in order to obtain the net present value of the cash flows.
| | 2. ''Banking''. |
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| | Net interest margin (NIM). |
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| The choice of discount rate should reflect the risks of the investment or project.
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| | 3. ''Bank lending''. |
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| 2. ''Short-term markets.''
| | Lending margin is a percentage amount added to a market reference rate, to calculate the total rate of interest payable by a borrower. |
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| In short-term financial markets, 'discount rate' means the quoted market rate for traded instruments quoted at a discount.
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| The market discount rate is quoted based on a percentage of the ''maturity amount''.
| | 4. ''Derivatives markets''. |
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| | Margin is a refundable cash deposit payable by market participants to protect other participants in the market against the risk of a default. |
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| <span style="color:#4B0082">'''Example 1: Discount rate calculation'''</span>
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| The maturity amount for an investment is £10m.
| | 5. ''Financing''. |
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| The gain for the single period from the start to the final maturity is £2m.
| | An amount built in to an interest rate or discount rate charged to a client to cover risk and a level of profit for the finance provider. |
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| The periodic discount rate (d) is:
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| (d) = Gain / End amount
| | 6. ''Secured lending''. |
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| = 2 / 10
| | An amount deducted from the value of an asset used as collateral, to calculate the maximum amount of any loan to be secured against the asset. |
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| = '''20%'''
| | Also known as a 'haircut'. |
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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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| 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 == |
| * [[Benchmark]] | | * [[Collateral]] |
| * [[Cost of capital]] | | * [[Futures]] |
| * [[Direction of influence]] | | * [[Haircut]] |
| * [[Discount]] | | * [[Initial margin]] |
| * [[Discount basis]] | | * [[Maintenance margin]] |
| * [[Discount instruments]] | | * [[Margin call]] |
| * [[Discounted cash flow]] | | * [[Margin risk]] |
| * [[Discount factor]] | | * [[NII]] |
| * [[Future value]] | | * [[NIM]] |
| * [[Interest rate]] | | * [[Stepped margin]] |
| * [[Monetary policy]] | | * [[Tax sparing]] |
| * [[Net present value]] | | * [[Variation margin]] |
| * [[Nominal annual discount rate]] | | * [[WGMR]] |
| * [[Periodic discount rate]]
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| * [[Periodic rate]]
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| * [[Present value]]
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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:Corporate_finance]]
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1. Accounting.
Profit margin measures the surplus of revenues over relevant costs, often expressed as a percentage.
2. Banking.
Net interest margin (NIM).
3. Bank lending.
Lending margin is a percentage amount added to a market reference rate, to calculate the total rate of interest payable by a borrower.
4. Derivatives markets.
Margin is a refundable cash deposit payable by market participants to protect other participants in the market against the risk of a default.
5. Financing.
An amount built in to an interest rate or discount rate charged to a client to cover risk and a level of profit for the finance provider.
6. Secured lending.
An amount deducted from the value of an asset used as collateral, to calculate the maximum amount of any loan to be secured against the asset.
Also known as a 'haircut'.
See also
