Discount Factors and Discount Rates

Install and import#

bash

npm install fintech-algorithms

import { discountFactorsAndDiscountRates } from "fintech-algorithms/financial-mathematics-statistics-and-data-foundations/financial-arithmetic-time-value-and-returns/discount-factors";

Signature#

discountFactorsAndDiscountRates(input)

Worked example#

verified This is the worked example published in the article, replayed by the test suite on every run. The output cannot drift.

Input#

input

{
  "principal": 1000,
  "rate": 0.05,
  "periods": 3,
  "compoundsPerPeriod": 12,
  "futureValue": 1200,
  "cashFlows": [-1000, 400, 400, 400],
  "startValue": 100,
  "endValue": 110,
  "returns": [0.1, -0.05, 0.08],
  "frequency": 12,
  "periodicReturn": 0.01
}

Call#

discountFactorsAndDiscountRates(input)

Returns#

object with 2 fields: discountFactor, discountRate

{
  "discountFactor": 0.863837598531476,
  "discountRate": 0.050000000000000044
}

Diagrams#

Calculation flow#

Discount Factors and Discount Rates — four-part map

flowchart LR
    A["Name the input"] --> B["Apply: discount factor = 1 / (1 + r)^t; PV = future cash x discount factor"]
    B --> C["Check units and boundary"]
    C --> D["Explain the output"]

How it works#

This page states the contract — how to call it correctly. The article explains the concept: why it works, and where it breaks.

Read the article →

References#

CFA_TVM - Time Value of Money in Finance — CFA Institute
CFA_QM - CFA Institute Quantitative Methods Study Session — CFA Institute
Author-derived and synthetic boundary