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Discounting

Discounting is the process of determining the present value of future payments, taking into account the time value of money where a dollar today is worth more than a dollar tomorrow due to interest-earning potential. Discounting figures out how much future payments are worth in today's dollars and is used to price cash flows from instruments like bonds by discounting the coupon payments and par value using an interest rate to determine the bond's current value.

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21 views

Discounting

Discounting is the process of determining the present value of future payments, taking into account the time value of money where a dollar today is worth more than a dollar tomorrow due to interest-earning potential. Discounting figures out how much future payments are worth in today's dollars and is used to price cash flows from instruments like bonds by discounting the coupon payments and par value using an interest rate to determine the bond's current value.

Uploaded by

Gaurav
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Discounting

What Does Discounting Mean?


The process of determining the present value of a payment or a stream of payments that is to be
received in the future. Given the time value of money, a dollar is worth more today than it would
be worth tomorrow given its capacity to earn interest. Discounting is the method used to figure
out how much these future payments are worth today.

Investopedia explains Discounting


Discounting is one of the core principals of finance and is the primary factor used in pricing a
stream of cash flows, such as those found in a traditional bond or annuity. For example, the
succession of coupon payments found in a regular bond is discounted by a certain interest rate
and summed together with the discounted par value to determine the bond's current value.

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