Discount rate and Queuing: Difference between pages

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imported>Doug Williamson
(Identify risk management context.)
 
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(DR).
''Risk management''.


1. ''Cost of capital.''
Queuing is a risk management arrangement whereby transfer orders are held pending by the originator/deliverer or by the system until sufficient cover is available on the originator’s/deliverer’s clearing account or under the limits set against the payor.  


'Discount rate' is often used as a synonym for the [[cost of capital]].
In some cases, cover may include unused credit lines or available collateral.
 
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.
 
 
The choice of discount rate should reflect the risks of the investment or project.
 
 
2. ''Short-term markets.''
 
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 ==
* [[Benchmark]]
* [[Caps]]
* [[Cost of capital]]
* [[Collateral]]
* [[Direction of influence]]
* [[Credit line]]
* [[Discount]]
* [[Gridlock]]
* [[Discount basis]]
* [[Risk management]]
* [[Discount instruments]]
* [[Discounted cash flow]]
* [[Discount factor]]
* [[Future value]]
* [[Interest rate]]
* [[Monetary policy]]
* [[Net present value]]
* [[Nominal annual discount rate]]
* [[Periodic discount rate]]
* [[Periodic rate]]
* [[Present value]]
* [[Yield]]
 
 
===Other links===
[http://www.treasurers.org/node/8837 Students: Triumph with timelines, The Treasurer, March 2013]


[[Category:Corporate_finance]]
[[Category:Manage_risks]]

Latest revision as of 14:44, 18 August 2018

Risk management.

Queuing is a risk management arrangement whereby transfer orders are held pending by the originator/deliverer or by the system until sufficient cover is available on the originator’s/deliverer’s clearing account or under the limits set against the payor.

In some cases, cover may include unused credit lines or available collateral.


See also