26.5 Discount Rate Method Examples
The following examples assume the interest rate has a format of zero coupon yield with annual compounding. The instrument used in each example is an annual-pay, 2-year instrument originated on the as_of_date. See the Oracle Financial Services Cash Flow Engine Reference Guide for details on discount factor derivation used in cash flow calculations.
Spot Input
In the Spot Input method, the discount factor does not vary with Forecast Rate - interest rate scenarios. The discount factor calculations assume the input interest rate to reflect a format of zero coupon yield, annual compounding, and actual/actual accrual basis.
Spot Input Rate = 6.00%
The formula for the market value of the account, for any rate scenario, is:
Market Value = Cash Flow1/ (1 + 0.06) + Cash Flow 2 / ((1 + 0.06)^2)
Cash Flow1 is the cash flow at the end of year 1. Cash Flow2 is the cash flow at the end of year 2.
Spot Interest Rate Code
In the Spot Interest Rate Code method, the discount factor depends on the term of the cash flow, but does not vary with interest rate scenario.
Interest Rate Code = Treasury Yield Curve
The formula for the market value of the account, for any rate scenario, is:
Market Value = Cash Flow1/ (1 + 1 Year Treasury) + Cash Flow2/ ((1 + 2 Year Treasury)^2)
Cash Flow1 is the cash flow at the end of year 1. Cash Flow2 is the cash flow at the end of year 2. The values for 1 Year Treasury and 2 Year Treasury reflect the values from the historical interest rate data, beginning with the as_of_date.
Forecast Remaining Term
The Forecast Remaining Term method uses forecasted interest rate data to determine the discount factor.
Interest Rate Code = Treasury Yield Curve
The formula for the market value of this account is:
Market Value = Cash Flow1/ (1+ 1Year Treasury Rate at the 1 year point in the forecast) + Cash Flow2/ ((1+ 2 Year Treasury Rate at the 2 year point in the forecast)^2)
Cash Flow1 is the cash flow at the end of year 1. Cash Flow2 is the cash flow at the end of year 2. The values for 1 Year Treasury and 2 Year Treasury reflect the scenario specific values from the forecast rates - interest rate data. Cash Flow1 is discounted at the 1 year Treasury rate, from the 1 year point of the forecast and Cash Flow2 is discounted at the 2 year Treasury rate, from the 2 year point of the forecast.
Forecast Original Term
The Forecast Original Term method uses the forecasted interest rate data to determine the discount factor.
Interest Rate Code = Treasury Yield Curve
The formula for the market value of the account is:
Market Value = Cash Flow1/ (1+ 2 Year Treasury Rate at the 1 year point in the forecast) + Cash Flow2/ ((1+ 2 Year Treasury Rate at the 2 year point in the forecast)^2)
Cash Flow1 is the cash flow at the end of year 1. Cash Flow2 is the cash flow at the end of year 2. Note that Cash Flow1 is discounted at the 2 year Treasury rate. The 2 Year rate is used with this method, because the Forecast Original Term method always uses the term equivalent to the original term of the instrument.
Effective Interest Rate
In the Effective Interest Rate method, the discount rate is derived from instrument column “EFF_INTEREST_RATE_C”. As this column is available at record level, discount rate attributed to each record can be different. If User is using this method, User needs to ensure that this column is calculate and populated.
As this is available at record level, same data would be used for all scenarios. The discount factor calculations assume the input data to reflect a format of zero coupon yield, annual compounding, and actual/actual accrual basis.
Effective Interest Rate for associated record = 6.00%
The formula for the market value of the account, for any rate scenario, is: Market Value = Cash Flow1/ (1 + 0.06) + Cash Flow 2 / ((1 + 0.06)^2)
Cash Flow1 is the cash flow at the end of year 1. Cash Flow2 is the cash flow at the end of year 2.
Note: If EFF_INTEREST_RATE_C column does not have any value or if it is null, then Discount Rate passed for calculation = 0%.