What is a Federal Discount Rate?

The discount rate refers to the interest rate used to change future payments to the present value, or the holder uses a bill that has not expired to ask the bank for cash, and the bank deducts the interest rate used first. This discount rate also refers to the rediscount rate, that is, the member banks guarantee the discounted bills as the interest paid when borrowing from the central bank.

discount rate

The relationship between discount and discount rate :

Discount rate policy is the main

Discount rate to currency multiplier

1. The central bank will add a new original money supply, which will make the total of demand deposits (money supply) expand to 1 / r times of this new original money supply. This 1 / r is called the money creation multiplier. r is the legal reserve ratio, and the currency creation multiplier is the reciprocal of the legal reserve ratio. Obviously, the legal reserve ratio is one of the influencing factors.

discount rate

2.The discount rate also affects the currency creation multiplier

An increase in the discount rate means that the cost of commercial banks' loans from the central bank has risen. In order to avoid this situation, commercial banks will increase their reserve reserves, that is, keep more reserves. In this case, the excess reserves of commercial banks will increase, resulting in an increase in actual reserves, thereby increasing the actual reserve ratio. The money creation multiplier is the inverse of the actual reserve ratio. Therefore, an increase in the discount rate will cause a decrease in the currency creation multiplier.

Discount rate cash ratio

Cash ratio (k), which is the ratio of cash in circulation to the demand deposits of commercial banks. The value of k depends mainly on the asset preferences of the public. Generally speaking, the factors affecting the value of k are: (1) the level of public disposable income. The higher the disposable income, the more cash you need to hold; conversely, the less cash you need to hold. (2) Public expectations of inflation. If the expected inflation rate is high, the value of k is high; otherwise, the value of k is low. (3) Social payment habits, the degree of development of banking credit instruments, social and political stability, and interest rate levels all affect the value of k. With other conditions unchanged, the larger the value of k, the smaller the currency multiplier; conversely, the larger the currency multiplier.

Discount rate excess reserve ratio

Excess reserve ratio (e). End of the value of e

It all depends on the business decisions of the commercial banks themselves. How much excess reserves a commercial bank is willing to hold depends mainly on the following factors:

(1) The opportunity cost of holding excess reserves, that is, the level of interest-earning capital returns.

(2) The cost of borrowing reserves is mainly the level of the central bank's rediscount rate. If the rediscount rate is high, it means that the cost of borrowing reserves is high, and commercial banks will retain more excess reserves in case they are needed from time to time; otherwise, it is not necessary to retain more excess reserves.

(3) Operating risks and liquidity of assets. If the operating risks are large and the liquidity of existing assets is poor, it is necessary for commercial banks to retain a certain amount of excess reserves in order to deal with various risks. Generally speaking, the larger the value of e, the smaller the currency multiplier; otherwise, the smaller the value of e, the greater the currency multiplier.

Discount rate reserve ratio

Statutory reserve ratio (rd) and time deposit reserve ratio (rt). The sizes of rd and rt are directly determined by the central bank. If the rd and rt values are large, the currency multiplier is small; on the other hand, if the rd and rt values are small, the currency multiplier is large.

The above analysis shows that the size of the currency multiplier is determined by factors such as k, t, e, rd, and rt.

In other words, the currency multiplier is affected by the respective behaviors of banks, finances, enterprises, and individuals. The other determinant of the money supply, the base currency, is directly controlled and supplied by the central bank.

Discount rate

The discount rate was originally the interest rate between the date of the discount and the date of maturity when the bank used the unexpired bills to fund the bank. When a commercial bank discounts this unexpired note to the central bank, it is called rediscounting. The interest rate or rediscount rate used for rediscounting is uniformly announced by the central bank. The rediscount rate can adjust the amount of money in circulation in the society, and the interest rates of various long-term and short-term loans implemented by banks must refer to the discount rate. Therefore, the discount rate becomes the general standard for calculating the prevailing interest rate. Economists use the discount rate as a bridge to convert future income and expenditure into present value. The higher the discount rate, the smaller the value of the same dollar of income or expenditure in the future converted into today's currency; in economics, the discount rate is a neutral concept, and its level is the supply and demand of money in the market and the situation It doesn't matter if the central bank's monetary policy decides.

discount rate

But sociologists have found more meaning from discount rates. The higher the discount rate, the less important the economic gains and losses in the future, and only the immediate profit and loss are important. If the concept of discount rate applicable to economic activities is extended to general social activities, a very meaningful concept of social discount rate can be drawn, which shows how much people pay attention to various things that will happen in the future. A high social discount rate means that people's sense of responsibility for the future is weakened, indicating that people only pursue immediate interests and become blind-sighted. Commercial breach of contract, political dishonesty, carelessness for equipment maintenance, indifference to environmental damage, irresponsibility for the next generation, and even drunkenness and drunkenness today are all attitudes expressed by high social discount rates. Therefore, the rise of the social discount rate is a dangerous signal. It causes social instability, weakens the connection between people, and the proliferation of opportunism.

Since the social discount rate is so important, is there a way to measure it? The economic discount rate is observable, but the social discount rate cannot be observed, and it does exist. Many economists and sociologists have failed to come up with an objective measurement, but understand what factors the social discount rate depends on.

First, it relies on the economic discount rate, which is self-evident. High inflation leads to high discount rates, which in turn leads to high social discount rates. Economists often treat inflation as a monetary phenomenon without paying attention to its social consequences. High inflation is one of the reasons for uncertainty about the future, and it causes people to be frustrated and irritable. Even if one lives in a poetic pastoral landscape, the thought of the high inflation that surrounds everything can be worrying. Secondly, social stability, especially political stability, has a significant impact on social discount rates.

In a word, in a war environment, people's lives and deaths are uncertain. Compared with people in a stable environment, there must be a higher social discount rate. For the same reason, the average life expectancy of a person affects the social discount rate; the higher the average life expectancy, the lower the social discount rate. Related to this is that the crime rate, traffic accident rate, and degree of occupational security in society all have an impact on the social discount rate. Even the average education level of the people, the degree of mutual trust between people, and the morality of society will reflect people's expectations of the future, which will affect the social discount rate.

It is worth noting that the positive and negative effects of policies on social discount rates should be noted in policy evaluations. Although some policies can benefit temporarily, they will hurt the social discount rate. Whether such a policy is worth affirming should be treated with caution. Unfortunately, a quantitative analysis method has not been proposed so far to make an objective evaluation of the social discount rate.

Discount rate formula

Because of the existence of tax rebates, the term foreign trade discount rate will appear, and there will be expected income. Otherwise, the foreign trade discount rate will be equal to the national exchange rate.

The formula is: discount rate = general loan interest rate / [1+ (discount period × general loan interest rate)]

Assumed exchange rate = 8.07, tax refund rate = 13%

If there is no tax refund

$ 1 = $ 8.07

Tax refund

Tax refund income = 8.07 * 0.13 / 1.17 = 0.897 yuan (8.07 is assumed based on full value-added tax)

Therefore, the cost of buying the product is only equal to 8.07-0.897 = 7.173. Converted into U.S. dollars = 7.173 / 8.07 = USD0.889.

In other words, at the end, it is equivalent to buying the previous 1USD product with USD0.889.

Relationship between discount rate and interest rate

The discount rate is based on interest rates.

Discount rate affects interest rates

Interest rate is an important leverage adjustment tool and professional name in financing practice such as economics, lending and leasing and corporate financial management. Therefore, interest rates include long-term and short-term deposit rates, long-term and short-term loan rates, and so on; that is, the level or level of interest rates will vary depending on the entity and term. The interest rate is often determined by the main body for the other party or agreed between the borrower and the lender. For example, the state determines the level of interest rate policy or the fluctuation range of the benchmark interest rate according to the state of the national economy. The bank determines the specific level (number) of borrowing and deposits based on the range. The amount of interest between the enterprise and the individual is determined by the lender or both parties. Wait.

The discount rate is often used in financial forecasting, corporate finance management, and measurement in specific financing practices. For example, the appropriate discount rate is used to forecast economic development, enterprise financial growth measurement, investment prediction and return measurement, asset evaluation and enterprise value evaluation, and so on. The determination of the discount rate is based on the relevant annuity period and the purpose of the discount rate, and the relevant factors (coefficients) are adjusted based on the interest rate. Generally, it is determined by the behavior of the party's own estimation.

Therefore, the discount rate is not necessarily greater than the interest rate. That is, the discount rate can be greater than, equal to, or less than the interest rate. The general discount rate is less than the market interest rate, the purpose is to prevent banks from using the difference to make a profit

Generally speaking, bill discounting can be divided into three types: discounting, re-discounting and rediscounting.

Discounting refers to the bill holder's acceptance of a banker's acceptance bill in order to obtain funds before the maturity date of the bill and transfer certain bill rights to the bank's bill. It is a way for the bank to transfer funds to the bearer.

The nature of discounting: Discounting is an asset business of a bank. The payer of a bill of exchange has liabilities to the bank. The bank actually has an indirect loan relationship with the payer.

Discounted interest rate: Floating on the basis of the current re-discounted interest rate of the People's Bank of China. The discounted interest rate is the market price and is determined by the two parties through negotiation, but the maximum cannot exceed the current loan interest rate.

The benchmark interest rate is usually the rediscount rate of the central bank in the West, and the interest rate of the People's Bank of China on commercial bank loans in China.

Calculation of discount interest: The discount interest is the interest paid by the beneficiary of the bill of exchange to the discount bank to obtain the bill before the bill expires. The calculation method is: discount interest (annual interest rate) = discounted cash amount x discount rate x (discount period / 360)

The discount rate is a very important basic concept in modern economics. It solves the problem of how future economic activities will be evaluated today. The positive discount rate indicates that whether a dollar is lost or gained in the future is not as important as the current dollar; and the longer the interval, the lower the future value. For example, if a project investing 1 million yuan today can recover 2 million yuan in the future, it cannot prove that this investment will be effective. Because if the 2 million recovered would wait 50 years, the value measured today would be far less than 1 million. This is because if the interest rate is 3% and 1 million yuan is deposited in the bank, the interest received in 50 years will also reach 3.38 million yuan (if the interest rate is 2%, the 50-year interest is 1.69 million yuan in Kunming). So it is not worth the investment to recover 2 million investment after 50 years compared with the interest earned by the deposit bank.

The opportunity cost of investing is the income from depositing this money in the bank. Because of this, we call the discount rate for future evaluations a discount rate. The discount rate was originally the interest rate payable by commercial banks to borrow from the central bank. Positive interest rates, or borrowing money to pay interest, have never been doubted, so the concept of a positive discount rate has gradually been firmly established. Before the reform, the investment evaluation did not use a discount rate, which was equivalent to assuming the discount rate to be zero, and treating future returns as the same as today's returns, resulting in a serious waste of funds. Now that this habit has been gradually corrected, only people outside the economics occasionally still use the old concept.

Later, sociologists transplanted the economic discount rate to sociology, and proposed the concept of social discount rate. The higher the social discount rate, it means that not only future money will be of little value today, but also all future events of society or individuals will not be of much importance today. In other words, only the moment is important. "Today is drunk and today is drunk" is a portrayal of this mentality. The high social discount rate is a sign that people have lost confidence in the future, are unwilling to be responsible, are not trustworthy, and have a deteriorating moral level. Many social scientists try to analyze what factors determine the social discount rate. Possible factors include political and public security stability, accidental mortality, average remaining life, and of course economic discount rate. Some scholars have even tried to estimate the value of the social discount rate.

As environmental and resource issues are increasingly a concern, how to deal with environmental and resource issues that may occur in the next generation involves determining the discount rate. A nuclear power plant with a life span of 30 years involves huge expenditures on site cleaning and nuclear waste disposal after scrapping. But since this is 30 years later, the amount of discounting to present value is very limited. Therefore, the concept of discount makes the net present value of nuclear power plants positive, and investment is considered feasible. Another example is that the life expectancy of the Three Gorges Dam on the Yangtze River may be 100 years. Few people think about the cost of cleaning up the Three Gorges Dam after it is scrapped. The reason is that the concept of discounting is a distant matter and it is not necessary to seriously consider it today. The temperature rise caused by more important greenhouse gas emissions has serious consequences, but because this is a hundred years later, everyone is in no hurry today. So many scholars proposed whether the concept of discount rate should be modified. But the arguments against lowering the discount rate are equally solid.

In theory, the discount rate is the inevitable conclusion of microeconomics. To overturn it will shake the theoretical framework of microeconomics. In practice, reducing the discount rate will make the capital supply tight and reduce the efficiency of capital use. , And it simply doesn't work in the market. So economists fell into serious logical contradictions. A well-known British environmental economist, Pearce, devoted a chapter in the book "The Blueprint for a Green Economy" to discussing discount rates in environmental issues; an opening article of Research Observation (July 1991) published by the World Bank It is about the relationship between the discount rate and the environment and development. However, these discussions did not fundamentally resolve the above-mentioned logical contradictions, but only proposed some policy remedies. The theory of a positive discount rate seems perfectly correct, but hits the wall when dealing with environmental issues.

Discount rate estimation

Capital asset pricing model (CAPM) and discount rate estimation

The capital asset pricing model uses non-dispersibility variance to measure risk, and relates risk to expected returns. Any non-dispersibility risk of assets can be described by value, and the expected return rate is calculated accordingly.

E (R) = Rf + (E [Rm] -Rf)

Where: Rf = risk-free interest rate

E (Rm) = Expected return on the market

The rate of return required by investors is the discount rate.

Therefore, from the capital asset pricing model formula, it can be seen that to estimate the discount rate, the following variables are known: the current risk-free interest rate (Rf), the market's expected rate of return (E (Rm)), and the beta value of the asset. .