Discount rate

If I lowered the discount rate, if this discount rate is

We have agreed on the rate of discount.

We have agreed on the rate of discount.

And the discount rate is this.

You can tweak that discount rate and make a few assumptions in discount rate and pretty much assume anything.

The present value would be if you discount this by some discount rate.

Then to discount money in the future to the present, we divide it by 1 plus the discount rate so this is a 5 discount rate.

The discount rate assumption is everything in finance.

What happens if I assume a 2 discount rate?

What is the present value of these if I assume a 2 risk free rate, or a 2 discount rate?

The Bank of Japan lowered its discount rate by half a percentage point Monday, bringing the key lending rate to 4.5 .

But right now, for simplification, we're assuming a risk free discount rate.

So the same thing is true when you're doing a discount rate.

And this discount rate, this is where all of the fudge factor occurs in finance.

And actually the whole topic of, how do you decide on the right discount rate?

Now at a 2 discount rate, choice number two is all of a sudden the best.

The Federal Reserve cut its benchmark discount rate to an 18 year low.

So it benefited the most by decreasing the discount rate, the 1.02 squared.

35 divided by and it's 2 years out, so we discount by our discount rate twice so it's divided by 1.05 squared.

Well, when you lower the interest rate, the terms that are using that discount rate the most, benefit the most.

But you can almost justify any present value, by picking the right discount rate.

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Another way to kind of just talk about this is to get the present value of 110 a year from now, we discount the value by a discount rate.

Any discount? Of course!

But in scenario one, because we used a 5 discount rate for all you could say, I don't want to use fancy words but for all durations out we used a 5 discount rate.

Then we get the Q value of 100 minus the Q value of zero, and the discount rate is 90.

The present value of this is it increased by 6 just by the discount rate going down by 3 .

So actually, most of finance, and most of portfolio theory, and modern finance, is based on figuring out that discount rate.

So it almost choice number one was the best when we had a 5 discount rate.

So you want to divide it by, let's say we use 11 as a discount rate.

So we take 110, and we're going to use the two year rate, and discount twice.

But then if the discount rate were to change if we were to change our assumption.

Plus 35 divided by the two year rate but this is an annual rate, so you have to discount it twice divided by 1.05 squared.

But the big learning from this is how dependent the present value of future payments are on your discount rate assumption.

Because if it's a year from now, you'd have to discount it by the one year interest rate.

It has the same learning rate, Alpha, and the same discount factor, Gamma and we just start applying that.

So far, we've been assuming that the discount rate is the same thing, no matter how long of a period we're talking about.

If you can think of a discount rate, you can make a very rational comparison between three, or ten, or whatever different types of payments.

And maybe I'll actually do that in the next video, just to show you how important the discount rate is.

In this situation, you take your payment, you discount it by your monthly interest rate, you get the loan amount.

Rate of decay?

Let's get discount tickets.

How much of a discount can you give?

Here you take each of your payments, you discount it, you divide it by 1 plus your monthly interest rate to the power of the number of months.