Thread Discussions: Discount Rate Preference (Essay Sample)
Please answer the following question
What is your personal discount rate or rate of preferences? I.e. how much would you pay for a promise of $1000 to be received one year from now? Would you discount it by 10%, 5%, etc?
Do research on the Internet and show the reference for the information.
Professor’s Note: In addition to searching the Internet for text related to this threaded discussion, please watch the following videos (click on the following link to access these videos) and post your comments.
http://www(dot)youtube(dot)com/watch?v=ks33lMoxst0 Introduction to Present Value
http://www(dot)youtube(dot)com/watch?v=4LSktB7Pk_c Present Value 2
http://www(dot)youtube(dot)com/watch?v=nScQsMmohZ0 Time value of money calculations using the TI BAII Plus calculator – part 1
http://www(dot)youtube(dot)com/watch?v=EocymirVokM Lesson TVM-10-060 - Clip 06 - PV of an Annuity Due - TI BAII Financial
Finance 301 Thread Discussions: Discount rate preference
The personal preference discount rate is compared to the interest rates charged by banks, corporate bonds and mortgage interest rates. My personal discount rate for $ 1,000 in one year’s time is 4%, and this is close to the average market interest rate one year’s time. The 4% discount rate is reasonable based on the prevailing interest rates in the financial markets. In the case of investment projects, the discount rate is also the rate of return and helps to determine how the choice of rate affects potential returns (Baddeley, 2013).
The choice of a discount rate is subjective and is based on assumptions of what one ought to receive in the future. Typically, the impact of transaction costs related to market rates affects the preference of discount rate the 4% is higher than the risk free rate. Other than this, is past experience with paying credit card debt, since the payment schedule affects the ability to pay for the debts. Even though, expectations on interest rates that are largely subjective the 4% is an appropriate discount rate that takes into account the market interest rate information available.
Publicly available information on interest rate provided by the Fed and the performance of the financial markets are potentially useful in comparing the viability of a discount rate. The idea behind the present value highlights the importance of disputing to determine changes in cash flows. The relevance of present value is that it allows one to understand the worth of future money today (Khan Academy, 2008). As such, when looking at the preferred interest rate, there is a need to understand how the ...
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