What is a Discount Rate in Finance?

A discount rate is the interest rate used to discount a stream of future cash flows to their present value. Depending upon the application, typical rates used as the discount rate are a firm's cost of capital or the current market rate. Management might also add a risk premium to a company’s cost of capital when it is evaluating the cash flows from an especially risky investment, in order to reduce the present value of its expected cash flows.

The term also refers to the interest rate that the Federal Reserve Bank charges to depository institutions that take loans from the Fed's discount window.