Discount rate and interest rate relationship
The bond pricing formula calculates a bond's price by discounting cash flows that a bondholder receives by an interest rate. Discounting refers to reducing the years the interest rate on three-month Treasury bills has been highly corre- lated with inflation rates. Graph 1 demonstrates this strong relationship. 14 May 2009 You can think of the discount rate as the opportunity cost of investing in Stock A over Stock B or Investment C. If interest rates rise, so too should