A discount rate is a percentage that is used to get the equivalent value today of a given sum of money to be received in the future. It is affected by several factors such as current inflation rate and state of the economy. That is whether boom or depression and future expectations of bond performance. These are among the elements that should be emphasized when calculating the discount rate. The following method is what should be used to determine the rate for the four factors below.
A risk-free equity is an instrument offered by the Federal Reserve Bank on bonds and treasury bills. They are usually considered to be risk-free, as the government guarantees their repayment. Factors affecting the interest rate offered are the state economy situation and current interest rates, which are usually higher than the discount rate. The current interest rate in the US stands at 6.18% and the economy has not yet recovered fully from the 2008 depression.The chosen discount rate, thus, will be about 5% so as to cater for these risks.
A certificate of deposit paid in local currency for a South American bank; it is a financial instrument offered by commercial banks in the US. This interest rate usually relies on the bank’s performance. If the bank is making huge profits, the interest will be low. Currently, it is about 8% and, thus, the interest rate should be about 6% as the banks are generally not performing quite well.
Stock in a company that deliver a stable income resulted from a long lasting contract is a very promising venture and, since the client is long-term, the interest rate will be the lowest among the four chosen to be at 4% below that of the US risk-free rate.
Company stock with no real operations currently ongoing but with a good business plan, which is of utmost importance as it is the blueprint of that company. However, a good business plan does not still guarantee success of a company and, due to the risk, it will have the highest discount rate which should be 10%.