Business and Personal Finance Dictionary

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• DISCOUNT RATE
  
  1.The percentage rate applied to the redemption value of a security in order to calculate a reduced value for a purchaser. Some (or all in the case of zero coupon securities) of the investor’s return comes from the resulting price discount. 2. The rate of return for short-term securities for which the investor’s entire compensation comes from the discount amount. 3. The rate of interest charged by the Federal Reserve Banks for advances. 4. An interest rate applied to a single cash flow that will not be paid or received until a future time in order to calculate the present value of that future cash flow. 5. An interest rate or a series of interest rates applied to every one of the future cash flows of interest and principal expected from a financial instrument in order to create a single value for that instrument. This single value is equivalent to the sum of the present values for each of the separate cash flows expected from the instrument. When prevailing market rates are used as the discount rate, this technique produces a fair market value that is used as a proxy for market value when the market value of a financial instrument is not readily available. See fair value.
  
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