Discount rate

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

And the discount rate is this.

This is the property tax rate.

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

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

We have agreed on the rate of discount.

We have agreed on the rate of discount.

The discount rate assumption is everything in finance.

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.

Because we have a 30 tax rate.

What happens if I assume a 2 discount rate?

Here, this is your assumed marginal income tax rate.

Which is essentially 3,000 of a 30 tax rate.

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.

The income tax rate increases in proportion as your salary rises.

The income tax rate increases in proportion to the salary increase.

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.

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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.

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

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

but let's, just for simplicity, assume my tax rate is still 30,000.

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

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

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?

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.

This income tax saving from interest deduction, this is assuming that at that marginal tax rate, you can deduct the property tax and the interest on the debt.

If your marginal tax rate is 20 , a 100 deduction will save you 20.

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

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

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.

So if you can deduct 100 in interest and property tax, if your marginal tax rate is 30 so that means at what rate are you being taxed on every incremental dollar.

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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.

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

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.

Let's get discount tickets.

Any discount? Of course!

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