What is discount rate
A discount rate is the interest rate used to turn money expected in the future into its value today. The same term also names the rate a central bank charges banks that borrow from it overnight.
The two meanings are linked. A central bank's rates feed into market interest rates, and those rates are the starting point for the discount rates that investors use to value bonds, shares and projects.
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Discount rate formula
The value today is called present value (PV). The amount expected later is the future value (FV).
PV = FV ÷ G^n
- r is the discount rate per period, written as a decimal.
- G is the growth factor per period: the full amount plus r.
- n is the number of periods until the payment.
A higher rate or a longer wait gives a lower present value. For several payments, such as bond coupons, you discount each payment separately and add the results.
Worked example (hypothetical)
Suppose a company promises to pay you a fixed sum of rupees at a future date. You compare two cases:
| Case | Discount rate | Present value of the same future sum |
|---|---|---|
| A | Lower | Higher |
| B | Higher | Lower |
If you use the SBP policy rate as a rough discount rate, the latest decision we have on record is SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). When the rate goes up, the present value of the same promised sum goes down. That is why bond prices usually fall when rates rise. To get exact figures, use the tools on the calculators page.
SBP discount rate and central bank rates
In Pakistan, people often say "SBP discount rate" when they mean the policy rate set by the State Bank of Pakistan's Monetary Policy Committee. The SBP runs an interest rate corridor. Banks can borrow from the SBP at a ceiling rate above the policy rate, and they can place funds with it at a floor rate below. Historically, the ceiling rate was the "discount rate" in the narrow sense.
In the United States, the Federal Reserve's "discount window" rate means the rate charged to banks borrowing directly from the Fed.
Where you see the term
- News and SBP statements: rate decisions are reported in basis points.
- Company reports: discount rates appear in valuations, impairment tests and lease accounting.
- Bond and T-bill quotes: some short-term bills are quoted on a "discount basis". That is a different measure from yield.
- Trading platforms: central bank rates feed into overnight swap fees and forward points.
Rate decisions can move currencies and indices quickly. Leveraged CFD and forex trading around such news can lose money fast.
Precise definition and edge cases
- Nominal vs real: a real discount rate removes inflation. Use nominal cash flows with a nominal rate, and real cash flows with a real rate.
- Compounding: the result depends on whether you compound annually, monthly or continuously.
- Risk premium: valuation discount rates are usually a risk-free rate plus extra for risk, for example WACC for companies.
- Negative rates: some central banks have set negative rates. The formula still works, but the present value can then exceed the future value.
- Discount yield vs yield: a bill's discount yield is based on face value, not on price, so it reads lower than the true yield.
Related terms
Coupon (bond) · Face value · Bond duration · Accrued interest · Covered interest parity · Annualized return · CAGR · Fundamental analysis · Trading glossary
Frequent questions
Is the discount rate the same as the interest rate?
It is an interest rate used in reverse. Interest grows today's money forward in time. Discounting brings future money back to today.
Is the SBP discount rate the same as the policy rate?
In everyday use, people often treat them as the same. Strictly, the policy rate is the target, and the corridor ceiling is the rate at which banks borrow from the SBP.
Why do bond prices fall when the discount rate rises?
A bond's price is the present value of its future payments. A higher rate reduces that present value.
Where can I check the current SBP rate?
Check the latest Monetary Policy Statement on the State Bank of Pakistan's official website.