Discount Factor
In the compound interest rate, the future value is calculated with the following formula.
Future Value = Present Value x (1 + R) n
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Where R is the Rate of Interest Rate (Yearly)
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N is the number of Years
For example if the annual rate of interest is 6% and a person takes a loan of ` 20000, the future value after 5 years will be as follows:
Future Value = 20000 x (1 + 0.06)5
? Future Value = 20000 x 1.06 x 1.06 x 1.06 x 1.06
x 1.06
So, Future Value = 26765
In formula which is used to reach from a Future Value to Present Value is used is as follows:
This is called Discounting in the banking business.
If we take the Future value as 1 then the result is called Discounting factor.
Simply: Present Value = Future Value X DiscountWhen a security is quoted at a price below its nominal or face value, it is said to be at a discount. Factor
Example: If a person pays 23200 to settle his loan amount which he had taken 3 years back at an interest rate of 15% per annum, what was the amount of loan?
The Present Value = 23200 x 0.657516 = 15,255
