* discount factor (say 0.8) for 5-year is used to discount any income received on the day 5 years from now. $100 received then is valued at $80 as "present value". Each periodic receipt from a bond must be discounted by the discount factor for the term. Since this is crucial to the yield concept, let's be specific.

** payout[1.5] (ie payout in 1.5 years) is discounted by discount factor [1.5] or DF1.5

** payout[2] (ie payout in 2 years) is discounted by discount factor [2] or DF2

* 1-year discount factor is close to 1. The longer the time span, the lower the discount factor, the deeper the discount.

* discount factor is **derived** from real prices, so reflects supply and demand, and reflects how much investors are/were willing to pay.

* discount factor is primarily a function of "distance" from today (ie wait-period), and not a function of asset class. If you like, the asset in question is liquid cash.

* Discount factor measures "how willing investors are to save". In high interest/inflation years, discount is deep and heavy. discount factor is lower. investors aren't willing to put money under their pillow since it devalues too fast.

## Tuesday, February 17, 2009

### foundation -- discount factor

Labels: original_content, z_bondMath

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