Discount Rate

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Discount Rate

Explanation: The discount rate acts as a measure of the “cost of waiting,” indicating how much less something in the future is worth in today’s terms. Just as compounding reveals the potential growth of money invested today over time, discounting assesses the current value of a future payment. While compounding utilizes an interest or growth rate to determine the future worth of an investment, discounting employs the discount rate to ascertain the present value of a future payment.

Example: consider depositing 100 rupees in a Fixed Deposit today with a 10% interest rate. After one year, the investment is expected to grow to 110 rupees, reflecting the compounding effect. This forward-looking calculation involves projecting the future value of the investment from its present worth. Conversely, discounting involves the reverse process. If asked to determine the present value of 110 rupees one year from now, utilizing a 10% discount rate allows for translating the future value back to its present equivalent. In this scenario, the 10% interest rate is referred to as the discount rate.

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