Valuation
Discount rate
The rate used to convert future money into what it is worth today.
How it works
A dollar in ten years is worth less than a dollar now, because of the risk-free return you forgo and the risk it never arrives. The discount rate prices both.
It is the single most influential input in any valuation. Raising it lowers the value of distant cash flows disproportionately, which is why long-duration growth companies fall hardest when interest rates rise.
Worked example
At an 8% discount rate, $1,000 in ten years is worth about $463 today. At 12%, it is worth about $322.
Related terms
- Discounted cash flowValuing a business by estimating its future cash flows and converting them to today’s money.
- WACCThe blended cost of a company’s debt and equity funding, weighted by how much of each it uses.
- Risk-free rateThe return available with essentially no risk of default, used as the baseline for every other return.
- Terminal valueThe estimated value of all cash flows beyond the explicit forecast period in a valuation.
- DurationHow much a bond’s price moves when interest rates change, expressed in years.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.