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Difference between Discount Rate and Interest Rate

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Discount Rate means the minimum rate of return to be paid by recipient of financing facilities from state bank of Pakistan for meeting temporary liquidity shortage. These days discount rate has been increased upto 15 % p.a. (Source: BPRD Circular # 14 of 2008). In simple words it is the rate that is used to discount the bill or receivalbe of the party.

Whereas Interest Rate means A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve Policies. These days local currency financing (lease or short/long term) cost KIBOR + 2.50 bps to 5.00 bps.

Normally the term used for lease and borrowing is interest rate rather than discount rate.

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posted @ 10:25 AM,

7 Comments:

At March 21, 2009 at 1:07 PM, Anonymous Dewani said...

I always thought and still think that in finance Discount rate is same as required rate of return i.e., interest rate; which include Real risk free rate of return + inflation premium + risk premium (for several risks like liquidity, maturity, default etc etc).

Discout rate applied to calculate the yield of bonds or valuing securities is same as required rate of return or interest rate.

Please rectify, if I am wrong.

Regards,
Asif

 
At March 24, 2009 at 10:15 AM, Anonymous Mubeshir said...

You are right. Discount rate meanings is also same as you mentioned above and it is used for capital budgeting calculations. However, in the post i tried to explain the term with respect to banking perspective.

 
At March 24, 2009 at 7:52 PM, Anonymous Jasmine said...

hi please write about business accounting software also

 
At April 9, 2009 at 2:16 AM, Anonymous Isireli said...

Are the terms, interest rates and rate of return same?

 
At October 22, 2011 at 1:30 PM, Anonymous Gloria Friday Uwak said...

I really need to get a clear difference between discount rate and interest rate

 
At November 2, 2011 at 7:00 AM, Anonymous Anonymous said...

There is difference in discount rate and interest rate
In Finance, discount rate is the cost of capital or opportunity cost. If we take WACC as discount rate,we take interest rate as a part of discount rate.
On the other hand,interest is the rate of return for per tk. investment.

 
At February 24, 2013 at 5:12 AM, Anonymous Anonymous said...

Can you give example please. . . ~_~ i am confused to these terms. . .

 

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