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 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.

Recommended

Latest issue
Investments

Latest issue

Latest issue of MoneyWeek magazine
30 Jun 2022
How will the crash of 2022 play out?
Investments

How will the crash of 2022 play out?

Stocks, bonds, cryptocurrencies – everything is crashing at the same time. We’ve seen these kinds of multiple collapses before, says Merryn Somerset W…
20 Jun 2022
When it comes to investing, sometimes you just have to have faith
Investment strategy

When it comes to investing, sometimes you just have to have faith

To be a successful investor, there’s no substitute for knowledge and experience. But you also need belief, says Dominic Frisby. Here, he explains how …
8 Jun 2022
Why the outlook for emerging markets is improving after years of underperformance
Investments

Why the outlook for emerging markets is improving after years of underperformance

Emerging markets have underperformed over the past decade. Alex Rankine explains what the outlook is.
5 Jun 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
Persimmon yields 12.3%, but can you trust the company to deliver?
Share tips

Persimmon yields 12.3%, but can you trust the company to deliver?

With a dividend yield of 12.3%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate compa…
1 Jul 2022
The income investor’s dilemma
Income investing

The income investor’s dilemma

Pay attention to dividend growth as well as initial yield when picking income trusts, says Max King.
4 Jul 2022