Discount rate

The discount rate is used to calculate how much the expected future income from an investment over a given period of time is worth right now (the net present value), which can help you decide what you should pay for it.

The rate used is usually based on the risk-free rate – the annual return you could expect to get on your money if you put it in the bank, or into a safe investment, such as UK government bonds over the same period. For example. if you are using a 5% discount rate, then £105 in a year’s time is worth the same as £100 today.

The riskier the investment, the higher the discount rate you should apply – after all, you expect to get higher return from a risky investment than for putting your money in the bank.

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.