The discount rate is the interest rate that the Federal Reserve charges commercial banks for short-term loans. It is also used in discounted cash flow analysis to determine the present value of future cash flows. The Federal Reserve has different tiers of discount rates for different types of loans. Borrowing institutions use this facility sparingly to avoid high-interest rates, and it is primarily intended as an emergency option for distressed banks. In cash flow analysis, the discount rate is used to assess the viability of a project or investment by calculating the present value of expected future cash flows. The risk-free rate of return and the weighted average cost of capital are commonly used as discount rates.
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