Q:
# How Do You Calculate a Discount Rate?

**Use either the yield on a 10-year US Treasury bond plus 5 percent or the weighted average cost of capital to calculate the discount rate.** The discount rate is defined for investors as the rate at which dollars in the future are brought back to their present value.

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Simply put, the discount rate is equal to the interest rate it will take to make a sum of money today equal to a value in the future, just applied in reverse. For example, if a person wants to have $100 two years from now and the current rate is 5 percent, then he should invest $90.70 today in order to reach that goal. Therefore, the discount rate of 5 percent is applied to the $100 amount in order to bring it back to the current value of $90.70. All of those calculations simply mean that $100 is worth $90.70 today.

The discount rate varies depending on who is doing the calculations. Different discount rates give different present-day values. The larger the rate, the lower the value. Some investors prefer to use a larger discount rate, especially for risky securities like small cap stocks. Future cash flows with these types of investments tend to be more volatile, and a larger discount rate gives investors a bit of a cushion.

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