Economics Time Value Of Money Questions
The concept of discount factor frequency period refers to the number of times interest is compounded or discounted within a given time period. It is used to determine the present value or future value of cash flows.
The calculation of discount factor frequency period depends on the compounding or discounting frequency. If the compounding or discounting is done annually, the discount factor frequency period is 1. If it is done semi-annually, the discount factor frequency period is 2. Similarly, if it is done quarterly, the discount factor frequency period is 4, and so on.
To calculate the discount factor for a specific frequency period, the formula is:
Discount Factor = (1 + r/n)^(-n*t)
Where:
- r is the interest rate per period
- n is the number of compounding or discounting periods per year
- t is the number of years
For example, if the interest rate is 5% per year and the compounding or discounting is done semi-annually (n=2), the discount factor for a 3-year period would be:
Discount Factor = (1 + 0.05/2)^(-2*3) = (1.025)^(-6) ≈ 0.8396
This discount factor can then be used to calculate the present value or future value of cash flows within the given time period.