Discounting

Description

Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. The discount, or charge, is the difference (expressed as a difference in the same units between the original amount owed in the present and the amount that has to be paid in the future to settle the debt. The discount yield is the proportional share of the initial amount owed (initial liability) that must be paid to delay payment for 1 year.

Related formulas

Variables

DiscountDiscount (dimensionless)
PValue of the original payment presently due (dimensionless)
r Market Rate of Return ( "charge" to delay payment for 1 year / debt liability) (dimensionless)
tTime to delay payment (in years) (dimensionless)