What is Discount Dollar Amount?

[fofx]

Hello,

I'm having a problem understanding Dollar Discount Amount (DDA) and can't really find anything on it using Google. I do have to leave open the fact that my tutor does explain things pretty badly...if at all, so this question may be nonsense.

Here is the equation we were given for DDA:

http://www.wedoitlikethis.com/fmta/DDA.png

We have previously calculated Discount Rate (DR) of a Money Market instrument...and I am happy that DR is the % applied to bring a future value into the present. But I don't know what this DDA is all about.

My best attempt at understanding it goes like this:

DR * FaceAmount (this gives the present value of the principle to be paid at maturity)

For example if DR is 4% and Principle is £200 (£200 * 0.96 = £192). So we have a value of £192. And then we multiply it by a number which is very small as maturity approaches and very large when maturity is a long time away.

If DaysFromSettlementToMaturity is 90 (days), the applied to the above number of £192, we have:

£192 * 0.25 = £48

...but I don't know what this number means, or if I have even followed the equation correctly and plugged in sensible values.

Can anyone help? Many thanks,
Fofx

 

[A Dashing Blade]

Can't see that it means anything other than the preasent value of the actual face amount.

In your example, I would imagine that your 4% day rate is an annualised percentage, thus you equation should be (assuming 30/360 day count)

£200 x (1 - (0.04*90/360)) = £200 * 0.99

 

[fofx]

So because the 4% applies over the period of 1 year, what this formula is actually is getting a fraction of the 4% applied over the whole year and applying it to the face value.

If we had 360 days until maturity, then the full 4% would be applied since 360/360 is 1.

So as maturity approaches less and less of the 4% discount rate is applied and the face value is multiplied by a value approaching 1.

Still not sure what Discount Dollar Rate actually means...given that Google doesn't show anything, I'm guessing he's made it up.

 

[scose-no-doubt]

Google discount factor or annuity factor tables. People call them strange things.

Edit. wait mis-read that.

I think it means dollar term discount rate.

(£200 * 4%) * 90/360 = £2

 

[The Artist]

Hi,
Looking at the formula, the DDA is only the $ amount added to a present value to obtain its future value.
So if you got £200 today at face value, in 3 month at 4% annually it will be 1% more, that is £202. The £2 is the DDA (200*0.04*90/360)

However the term is confusing since discounting involves finding out today's value of a future payment so it does not really make sense to call it this way. Logically, the formula should be a division, not a multiplication, and give you the $ amount that needs to be "discounted" from a future payment to obtain its present value.

Good luck clearing this out with your tutor.

 

[scose-no-doubt]

way to copy me, artist