The Site Discount Rate

In terms of Economics, discount rate is described as the interest rate the Fed charges depository institutions that borrow reserves from it.

The term discount rate has two meanings:

* the same as interest rate; the term "discount" does not refer to the meaning of the word, but to the purpose of using the quantity, such as computations of present value, e.g. net present value / discounted cash flow

* the annual effective discount rate, which is the annual interest divided by the capital including that interest; this rate is lower than the interest rate; it corresponds to using the value after a year as the nominal value, and seeing the initial value as the nominal value minus a discount; it is used for Treasury Bills and similar financial instruments

Annual effective discount rate

The annual effective discount rate is the annual interest divided by the capital including that interest, which is the interest rate divided by 100% plus the interest rate. It is the annual discount factor to be applied to the future cash flow, to find the discount, subtracted from a future value to find the value one year earlier.