In one video you have the discount rate column formula referencing the discount rate, in another video (pre-payments) I saw the formula is referencing the loan interest rate. Which should it be referencing?
@docbrownexcels Жыл бұрын
To calculate a loan's NPV, you will always discount at the discount rate. The discount rate can be thought of as the opportunity cost of capital, or the fair, risk-based rate for borrowing the money. Importantly, the interest rate charged on the loan does not always match with the discount rate. When the interest rate is higher than discount rate, the NPV of the loan will be negative from the borrower's perspective, as they are paying a higher rate than is warranted given the riskiness of the loan. If the interest rate is equal to the discount rate (which is often assumed), then the NPV of the loan will always be zero, as you are paying a fair price for the money. Note that NPV zero implies that both the lender or the borrower are getting "fair deals."