Discount Rate

Discount Rate — the rate at which future mortgage payments are discounted back to their current dollar value. It represents the return an investor demands in exchange for tying up capital and assuming the risks associated with a particular note. A higher discount rate produces a lower present value, meaning the investor would pay less for the note; a lower discount rate results in a higher price.

Selecting an appropriate discount rate is one of the most important decisions a note investor makes. The rate typically accounts for the risk-free rate of return, the credit quality of the borrower, the condition and value of the collateral property, and the overall market environment. In the secondary note market, discount rates vary widely depending on whether a note is performing or non-performing, the lien position, and the strength of the underlying documentation.