Discount Factor

In the compound interest rate, the future value is calculated with the following formula.

Future Value = Present Value x (1 + R) ⁿ

• Where R is the Rate of Interest Rate (Yearly)
• N is the number of Years

For example if the annual rate of interest is 6% and a person takes a loan of ` 20000, the future value after 5 years will be as follows:

Future Value = 20000 x (1 + 0.06)⁵

? Future Value = 20000 x 1.06 x 1.06 x 1.06 x 1.06
x 1.06

So, Future Value = 26765

In formula which is used to reach from a Future Value to Present Value is used is as follows:

This is called Discounting in the banking business.

If we take the Future value as 1 then the result is called Discounting factor.

Simply: Present Value = Future Value X Discount Factor

Example: If a person pays 23200 to settle his loan amount which he had taken 3 years back at an interest rate of 15% per annum, what was the amount of loan?

The Present Value = 23200 x 0.657516 = 15,255