The discount rate is the interest rate that the central bank charges commercial banks that need to borrow additional reserves.
The Fed's decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks will be lowered to 5.75 percent from 6.25 percent.
In addition to cutting the funds rate, the Fed announced it was reducing its discount rate, the interest it charges to make direct loans to banks, by a quarter-point, as well, to 4.75 percent.
And the cost to the supplier of immediate cash payment by the bank, in respect of the implicit interest rate or discount on the bill, ought to be tiny - because the bank is in effect lending to the safe big company, which ultimately honours the bill, not to the riskier supplier.
Low interest rates reduce the discount rate on corporate earnings and cash flow, raising their present value.
The interest rate allows me to discount the value of some cash payment in the future to the value the principle would hold for me if I had it now.
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As a result of the power of compound interest, the choice of discount rate used to estimate the potential economic costs of climate change is more important for purposes of understanding the trade-offs associated with competing climate-change policy options than perhaps any other single issue in climate change economics.
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As the storm gathered during 2008, the Fed aggressively eased monetary policy by using such open market operations (supplemented by discount rate reductions) to drive short-term interest rates to near-zero levels.
If QE2 succeeds, interest rates will eventually increase as the Federal Reserve will raise the discount rate to ensure economic growth and the likely resulting inflation does not overshoot its targets.
There was also some interest-rate liberalization as Chinese banks are now allowed to lend at a discount of up to 20% below the benchmark, compared with a previous floor of 10%.
Because the dividends on Laffer Shares would vary depending upon GDP growth rates, the markets would discount the expected cash flows at an equity rate of return, which is considerably higher than the interest rate on government bonds.
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Three factors determine the health of any pension fund: asset returns, company contributions and the discount rate, which is used to calculate the present value of pension liabilities and is tied to interest rates.
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If shares change in value, that must reflect a change in investors' assessment of either the prospective dividend flow (for example, because of fears about the future level of profits) or the right discount rate (for example, because of a change in inflationary prospects or in long-term real interest rates), or both.
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