Discounting

Discounting - The rate of discount is calculated as the...

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Discounting Discounting is an opposite process. The interest rate enhances the present value of the principal in the future course of time. On the other hand, the discounting method reduces future incomes or values at a certain rate to determine their worth under present valuation. Since the future is uncertain, price levels and other conditions may alter and therefore the lender considers the future value to be lower under present valuation.
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Unformatted text preview: The rate of discount is calculated as the extent of difference in valuation. Normally the rate of interest also acts as a rate of discount. In the above example the amount of $1100 an year ahead is equivalent to $1000 today. This way, the present value of the future income has been discounted by 10 percent....
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