Discount Rate

The interest rate used to calculate the present value of future cash flows. Two interchangeable framings always produce the same number: (1) opportunity cost — what return you would earn on your best alternative use of the money; (2) risk-adjusted required return — what return the investment must offer to compensate for the risk. Higher discount rate → lower present value of any future promise. When the Federal Reserve raises rates, every investor's discount rate creeps up; long-duration assets (growth tech, 30-year bonds, real estate with distant cash flows) fall harder than short-duration ones because the higher rate compounds over more periods.

Lessons that use this term

• Cost of Capital: What Discount Rate to Use
• DCF: What Is a Company Really Worth?
• Time Value of Money: Why a Dollar Today Beats a Dollar Later
• The Time Value of Money
• Perpetuities, Gordon Growth, and Uneven NPV
• Pension Footnotes: Where Hidden Leverage Lives
• Sensitivity Analysis: Stress-Testing Your DCF

Related terms

Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta

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