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In interest rate term structure analysis, the reciprocal of the quantity, one plus the spot rate of interest, raised to the maturity of the instrument. Thus, if the spot rate of interest equals 8% and the term to maturity equals five, the discount factor equals (1 / 1.08)5 = 0.6806. The discount factor must fall between 0 and 1. It approaches 0 as term to maturity approaches infinity, and it approaches 1 as term to maturity approaches 0. Although the discount factor decreases at a decreasing rate with term to maturity, it adjusts price as a percentage of value proportionately with time.
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