As a result of the power of compound interest, the choice of discount rate used to estimate the potential economic costs of climate change is more important for purposes of understanding the trade-offs associated with competing climate-change policy options than perhaps any other single issue in climate change economics.
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If you assume that the bond is selling at par, has an average coupon of 5.5%, say, and you use a discount rate of 6%, then you are implicitly saying that the bond is actually riskier than the market perceives it to be.
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The controversy surrounding the choice of discount rate used in climate-change economics still rages today.
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If the stock passed, I ran another valuation using a discount rate of 8% and a CAP (competitive advantage period) of 10 years.
This makes it all the more surprising that some companies pay little attention to the impact on the discount rate of changes in their cost of capital.
If you are going to use a discount rate of 6% AND assume the bonds are selling at par, then you MUST assume that the coupon on the bond is also 6%.
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Steve Hodge, treasurer of Shell, an Anglo-Dutch oil giant, says that a difference of only one percentage point in the discount rate can change the value of, say, an oil refinery with a 15-year life by hundreds of millions of dollars.
If shares change in value, that must reflect a change in investors' assessment of either the prospective dividend flow (for example, because of fears about the future level of profits) or the right discount rate (for example, because of a change in inflationary prospects or in long-term real interest rates), or both.
In fact, the Fed was established as a result of the Panic of 1907 and the discount mechanism and rate were the only tools of monetary policy given to the Fed in the Federal Reserve Act.
It calculates an intrinsic value by discounting a stream of future earnings back to the present, using a discount rate that is a function of both Aaa bond yields and the creditworthiness of the target company.
If you consider the present Federal Funds rate to be a quarter of a percentage point, the preferred discount rate will be one and a quarter percentage points.
There is a lot of debate about the right discount rate to use, but the conservative approach is to take the cost of government borrowing.
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The logic of a penalty discount rate is that the Fed prefers to let the rate structure ration Federal Reserve credit rather than having to do so administratively.
And the cost to the supplier of immediate cash payment by the bank, in respect of the implicit interest rate or discount on the bill, ought to be tiny - because the bank is in effect lending to the safe big company, which ultimately honours the bill, not to the riskier supplier.
As a result the most important variables to the price of an asset are the level and future shape of free cash flows, and the discount rate used, which, as you rightly point out, can be analysed in terms of risk premium.
Three factors determine the health of any pension fund: asset returns, company contributions and the discount rate, which is used to calculate the present value of pension liabilities and is tied to interest rates.
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One challenge when evaluating tech stocks in this particular segment is finding a discount rate (required rate of return) that includes enough of a risk premium.
The interest rate allows me to discount the value of some cash payment in the future to the value the principle would hold for me if I had it now.
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Bank of America ( BAC - news - people ) aims its bank- card pitch at employers who buy them in bulk as staff gifts. (BofA declined to comment on whether employers receive a discount rate for buying scads of cards at a time.) There's no dormancy fee with BofA's product, but after nine months the cards become worthless, whatever the remaining balance is.
Currently, we are using a 10-year Treasury bond yield of 6% as a discount rate.
The discount rate is basically a measure of what you have to be paid to put off current gratification.
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The problem lies in the uncertainty surrounding both its components: the future stream of dividends and the appropriate discount rate.
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Private plans' use of a bond-based discount rate reflects that higher equity returns are not a free lunch--the firm will be required to cough up extra cash if the assets underperform.
Ultimately Volcker was caught unaware by how very much the four Reagan appointees (Martha Seger and Preston Martin the others) were of the mind that the discount rate needed to come down.
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The Federal Reserve, lagging other central banks, pumped in extra money and then cut its discount rate to prevent a seizure of the financial system in the aftermath of the subprime mortgage market debacle.
The cut to the discount rate was requested by the boards of the Fed district banks in Boston, New York, Cleveland, St.
Each year's number is discounted back to the present at a discount rate that accounts for the growth of the ten-year Treasury, inflation and equity risk, which stands right now at 8.4%.
Because the issuer determines the fair value of the CVR by designating a discount rate that purportedly estimates the likelihood that the milestones will or will not occur, the fair value measurement itself is highly controversial.
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And raising that discount rate really does lower that social cost of carbon emissions.
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In fact, changes in discount rate expectations account for about 100% of variation across most securities and markets.
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