Discount factor - Financial definition
Financial acronyms
The entire acronym collection of this site is now also available offline with this new app for iPhone and iPad.
Concise definition of the term discount factor
The discount factor is the factor by which a future cash flow has to be multiplied in order to obtain its present value.
Comprehensive definition of the term discount factor
The discount factor is calculated a function of the time period and the discount rate. It is calculated using the following formula:
\[ PV_{f}=\frac{1}{\left ( 1 + i \right )^{n}} \]
Point on the formula to see its legend
Let's take for example a payment of $1 to be received 3 years into the future, where the annual discount rate is 2%.
Using the formula above, the discount factor would be 1 / (1 + 0.02)3 = 0.9423.
Using the formula above, the discount factor would be 1 / (1 + 0.02)3 = 0.9423.