4.3.9 Discount Methods
This module describes the procedure for working with and managing Discount Method Rules. Discount Method Rules allow users to define the method for discounting projected Cash Flows for market value and duration calculation purposes. For each combination of product and currency, you can choose one of the following discount methods:
- Spot Input
- Spot Interest Rate Code
- Forecast (Original Term)
- Forecast (Remaining Term)
The following table describes the methods and rate choices:
Table 4-55 List of Discount Methods
| Method | Single Rate | Yield Curve |
|---|---|---|
| Spot Input | Discounts all cash flows by the Input Rate | Not applicable |
| Spot Interest Rate Code | Not applicable |
Discounts each Cash Flow period by the equivalent term rate on the base Yield Curve chosen (the Yield Curve as of the start date). The term is defined by the remaining term of the cash flow. Refer Note |
| Forecast (Original Term) | Not applicable | Discounts each Cash Flow period by the Forecasted Value of the point on the yield curve corresponding to each transaction record's original term (fixed rate instrument) or repricing term (variable rate instrument). Refer Note |
| Forecast (Remaining Term) | Not applicable |
Discounts each Cash Flow period by the Forecasted Value of the point on the Yield Curve corresponding to the remaining term until each cash flow. Refer Note |
| Effective Interest Rate | Effective Interest Rate (EIR) of account is used as discount rate. | Not applicable |
Note:
In the case of Spot Interest Rate Code, if term point is not available, engine will use linear interpolation to determine the interest rate to discount cashflows.
When Discounting method of Forecast (Original Term) and Forecast (Remaining Term) is used, if term point is not available, engine will use Interpolation method defined for Interest rate code within Forecast Rate Rule. If Interpolation method defined in Forecast rate rule is Linear, engine will use Linear Interpolation. If Interpolation Method is cubic, engine will use Cubic Interpolation to determine interest rate to discount Cash Flows.
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