Investing term
What is Discount rate?
The annual rate used to translate future dollars back into today's dollars in a DCF.
The discount rate is the annual percentage used to translate future money into today's value in a valuation. It reflects both the time value of money — a dollar now can be invested and grow — and the riskiness of the cash flows, so riskier or more distant cash gets discounted more heavily.
It's the crucial, and most contentious, input in any discounted cash flow. A higher discount rate makes future cash worth less today, lowering the valuation; a lower rate does the opposite. Because the choice is partly judgement — how risky is this business, what return do I require? — reasonable people arrive at different rates, and the valuation moves a lot with it. The discount rate is also why rising interest rates pressure asset prices: as the baseline return on safe assets climbs, so does the rate at which all future cash flows are discounted, cutting what those cash flows are worth today.
The discount rate converts future money to today's value. A higher rate discounts future cash harder — $100 in ten years is worth ~$56 at 6% but ~$32 at 12%. It's why rising rates lower asset prices.
For example
At a 9% discount rate, $100 due in ten years is worth about $42 today; raise the rate to 12% and the same $100 is worth only about $32.
Learn it by doing
That's Discount rate in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
The discount rate matters because it single-handedly determines how much future cash flows are worth now — and it's why the whole market re-prices when interest rates move. A small change in the rate can swing a valuation dramatically, which is why so much of the debate in a DCF is really an argument about the discount rate. Understanding it explains why higher rates hurt growth stocks most: their value is concentrated in distant cash flows, which get discounted hardest.
⚠ Picking a rate to justify the answer you want
Because the discount rate swings a valuation so much, it's the easiest lever to fudge — nudge it down and any stock looks cheap. Choosing the rate to reach a predetermined conclusion turns a DCF into a rationalisation. The rate should reflect the genuine time value of money and the real risk of the cash flows, set before you look at the answer, not tuned to produce the price you hoped for.