9/25/2019 Discount Rate vs Interest Rate | 7 Best Difference (with infographics)

Discount Rate vs Interest Rate

()

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advances/) roce/)

Difference Between Discount Rate vs Interest

Rate

Discount Rate is the interest rate that the Federal Reserve Bank charges to the depository
institutions and to commercial banks on its overnight loans. It is set by the Federal Reserve Bank,
not determined by the market rate of interest (https://www.educba.com/interest-rate-vs-annual-

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percentage-rate/). An interest rate is an amount charged by a lender to a borrower for the use of
assets. Interest rates are mostly calculated on an annual basis, which is also known as the annual
()
percentage rate. The assets borrowed can be cash, large assets such as a piece of machinery,
vehicles or building.

  Discount Rate

In Finance, the discount rate can be de ned as the following:

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1. The discount rate is used in the concept of the Time value of money- determining the present

value of the future (https://www.educba.com/present-value-vs-net-present-value/) cash

ows in the discounted cash ow analysis (https://www.educba.com/what-is-discounted-

cash- ow/). It is more interesting for the investor’s perspective. The time value of money
means a xed amount of money has different values at a different point of time. Let’s take an

example, which would be a better choice of getting Rs.100 today or getting Rs. 100 at the
end of the year. The better choice would be getting Rs.100 today as you can earn a return if

you invest it and you will be having the Rs.100 plus the return at the end of the year.
2. The discount rate can also be referred to the rate at which liabilities are discounted by the

insurance (https://www.educba.com/insurance-vs-assurance/) and pension plan

(https://www.educba.com/pension-vs-annuity/) companies.

 
Interest Rate

Interest is the cost a borrower compensates to use someone else’s money.

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9/25/2019 Discount Rate vs Interest Rate | 7 Best Difference (with infographics)

For Example, Anand has taken Loan amounting Rs. 20,00,000 at a 6% annual rate of interest from
() bank didn’t give the requested loan amount. They are just lending you their money
a Bank. The

(https://www.educba.com/lending-vs-borrowing/) for a certain period of time (Assume 15 years).

You have to pay the money back to the Bank, but not the whole amount at a time, you have to pay
it year on year and also the 6 percent interest on the outstanding Loan balance for the privilege of

using their money. Home loans, Car Loans, credit cards and Education loans all follow the same
principle.

Buy a 10- Year bond or make a Fixed Deposit in the bank, and you’ll be getting the interest.
However, someone will pay you interest for using your money. Interest rates are directly

proportional to the risk pro le of the borrower. The interest rate will be higher if the borrower’s
pro le is considered risky, the rate of interest charged on them will be on the higher side.

  Discount Rate vs Interest Rate Infographics

Below is the top 7 difference between Discount Rate vs Interest Rate:

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  Key Differences Discount Rate vs Interest

Rate

Both Discount Rate vs Interest Rate are popular choices in the market; let us discuss some of the

major Difference Between Discount Rate vs Interest Rate:

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The interest rate is the amount charged by a lender to a borrower for the use of assets. The

lenders here are the banks and the borrowers are the individuals. Whereas, Discount Rate is
the interest rate that the Federal Reserve Banks charges to the depository institutions and to
commercial banks on its overnight loans.

Interest rates depend on a number of factors such as Borrower’s creditworthiness, a risk

associated with lending. Whereas, the discount rate is calculated after taking consideration

the average rate that one bank would charge to other banks for taking the overnight loans.

The discount rate can also be used in the concept of Time value of money- determining the
present value of the future cash ows in the discounted cash ow analysis. It is more

interesting for the investor’s perspective. Whereas, Interest rates are calculated from the

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9/25/2019 Discount Rate vs Interest Rate | 7 Best Difference (with infographics)

viewpoint of the Lenders.

Interest rates are affected by Demand and supply in supply in the economy whereas,
()
Discount rates are not affected by Demand and supply in supply in the economy.
The lenders charge the Interest rate by the following two ways i.e., Simple Interest and

Compound Interest (https://www.educba.com/simple-interest-rate-vs-compound-interest-

rate/). Whereas the calculation of Discount rate is complex- Determining the present value of
the future cash ows in the discounted cash ow analysis.

  Head To Head Comparison Between Discount

Rate vs Interest Rate

Below is the topmost comparisons between Discount Rate vs Interest Rate

 The basis of comparison Interest Rate Discount Rate

between Discount Rate vs

Interest Rate

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9/25/2019 Discount Rate vs Interest Rate | 7 Best Difference (with infographics)

Meaning An interest rate is an amount Discount Rate is the interest

() charged by a lender to a rate that the Federal Reserve
borrower for the use of Banks charges to the
assets. depository institutions and to

commercial banks on its

overnight loans.

Charged on Individuals/ Borrowers Depository institutions/

Commercial banks

Rates are Decided by Commercial banks Central Banks

Dependency Depend on a number of Not determined by the

factors such as Borrower’s market rate of interest, is

creditworthiness, the risk decided by the central banks.

associated with lending and

market rate of interest.

Usage Cannot be used in Can be used in determining

determining present value. the present value of the
future cash ows.

Perspective  Based on the Market and  Focusing on the Investor’s

focusing on the Lender’s point of View

point of View

Economies Affected by Demand and Not Affected by Demand and

supply in supply in the supply in supply in the

economy. economy.

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9/25/2019 Discount Rate vs Interest Rate | 7 Best Difference (with infographics)

 
()
Discount Rate vs Interest Rate – Final
Thoughts

After examining the above information, we can say that Discount Rate vs Interest Rate are two
different concepts. A discount rate is a broader concept of Finance which is having multi-

de nitions and multi-usage. Whereas Interest rate has a narrow de nition and usage, however,
multi things are to consider before determining the interest rates. In some cases, you have to pay
to borrow money then it is a direct nancial cost. In other cases, when you invest money in an

investment (https://www.educba.com/the-importance-of-investments/), and the invested money

cannot be utilized in anything else, then there is an opportunity cost
(https://www.educba.com/opportunity-cost-formula/). Discount Rates vs Interest rates both are

related to the cost of money but in a different way. If you have an interest in Finance and want to
work in the Financial Sector in the future, then you should know the difference between Interest

rates and Discount rate.

  Recommended Articles

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also discuss the Discount Rate vs Interest Rate key differences with infographics and comparison

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