What are Discount Rates? (Financial Mathematics Lesson 8)
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In this lesson we learn about discount rates and how they are rates of “interest payable in advance” rather than “interest payable in appears,” which is the type of interest rates we have looked at thus far. We discuss how this calculation is different and discover the many formulas that revolve around discount rates. This includes the concept that a discount rate acts as a present value factor. We look at brief examples using these equations, and then move onto discussing how discount rates can be simple rates or nominal rates as well. Then finally we compare the difference in the use of discount rates and typical interest rates in present value and future value scenarios.
This course is designed to help students understand the concepts of mathematics of investment and credit, as well as provide a starting point in preparation for the Actuarial Exam FM (Financial Mathematics).
Financial Mathematics requires a proficient understanding of Calculus concepts such as derivative and integration techniques. This implies that a solid understanding in various algebra skills, including manipulating equations, basic factoring methods, solving logarithmic equations, and more, are also required to fully comprehend and learn the concepts of the Financial Mathematics course.
Video Chapters:
0:00 What is a Discount Rate?
4:31 Finding Discount Rate Formulas
8:37 Example - Using Discount Rate Formulas
10:38 Simple Discount Rates
11:19 Nominal Annual Discount Rates
11:47 Comparing Future Value and Present Value Equations
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