Talk:Discounting/Archives/2016

Assessment comment

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Please do not combine Discounting, Discount & Discounted Cash Flow. Completely separate discussions even though they are related. Discount is not necessarily from a "Discounted Cash Flow". A reference between these 3 items might be useful. But combining them in 1 single discussion would tend to be cumbersome, & might lose some of the detail needed to fully explain each if one tries to make it less cumbersome. I agree. "Discount" in accounting terminology simply means a "reduction in price." This, I believe, should be used or something like it, as a definition of the word "Discount." Then presenting the concepts of "discounting" and/or doing a "DCF - Discounted Cash Flow;" each are a process. In the DCF, for example, it attempts to determine the present value of a future cash flow in which a "discount rate" is built and used. Because the word 'discount' is used here bears no relevance to defining the initial, most common, use/practice in accounting of a "discount;" a word we see and of which we have taken advantage of every day. "Discount" can be defined may ways but in the end is simply a "reduction in price" with a real debit and a real credit when the transaction occurs. My vote: keep these three words/concepts/processes separate and distinct. —Preceding unsigned comment added by Gcndfw (talk • contribs) 04:57, 13 June 2010 (UTC)

Last edited at 04:58, 13 June 2010 (UTC). Substituted at 13:29, 29 April 2016 (UTC)

Discount factor

Can anybody give a citation (source) for what is written in section "Discount Factor"? The statement that if the interest rates are taken from a yield curve, the discount factor is ${1/(1+rT)}$ contradicts to what is written in the article on the Yield curve:

"More generally, returns (1+ yield) on a long-term instrument are assumed to equal the geometric mean of the expected returns on a series of short-term instruments: ${\displaystyle (1+i_{lt})^{n}=(1+i_{st}^{{\text{year }}1})(1+i_{st}^{{\text{year }}2})\cdots (1+i_{st}^{{\text{year }}n}),}(1+i_{lt})^{n}=(1+i_{st}^{{\text{year }}1})(1+i_{st}^{{\text{year }}2})\cdots (1+i_{st}^{{\text{year }}n})$, where ist and ilt are the expected short-term and actual long-term interest rates."

Example: If the yield curve is flat at 2%, shouldn't the market value of any risk-free bond paying a yearly coupon of 2% p.a. whose time-to-maturity is an integer multiple of entire years equal its face value? Now, if future payments were discounted by the discount factor ${1/(1+T*0.02)}$, as stated in the text, this would not be true, as one can easily check.

If $r$ is the spot rate p.a. for a $T$-year investment, then the $T$-year discount factor is, by definition of a spot rate, $1/(1+r)^{T}$. No? 46.126.111.69 (talk) 21:14, 24 October 2016 (UTC)