.svg)
.svg)
.svg)
.svg){kind=icon}
.svg)
.svg){kind=icon}
.svg)
.svg){kind=icon}
.svg)
.svg){kind=icon}
.svg){kind=icon}
.svg){kind=icon}
The discount rate is the interest rate used to convert future amounts back to their value today. It shows how much a future amount is worth at present. The higher the discount rate, the lower the current value of future income.
The discount rate helps to assess future profit or cash flows realistically.
Investments often involve money that you expect to receive in the future. Because money today is worth more than the same amount in the future, an adjustment is made through the discount rate.
It is often based on interest rates, risk and expected inflation. The higher the risk of an investment, the higher the discount rate that is usually applied. As a result, the present value of future income decreases when risk increases.
Short example:
Suppose you expect to receive €1,000 in one year. If the discount rate is 5%, the present value is €1,000 divided by 1.05. That is approximately €952.
If the discount rate is 10%, the calculation becomes €1,000 divided by 1.10. The present value is then approximately €909. The higher the discount rate, the lower the value of the same future amount.
Disclaimer: Investing involves risks. Our analysts are not financial advisors. Always consult a professional advisor when making financial decisions. The information and tips provided on this website are based on the personal insights and experience of our analysts and are intended for educational purposes only.
