Describe a method for measuring the relationship between risk and return. The end result is the required return on an asset with a given level of risk. This is also the appropriate discount rate to use when evaluating that asset. There is a certain level of risk in owning any asset, and a corresponding discount rate. People even have their own personal discount rates, even people who have no idea what a discount rate is. Each person's current need for cash, tolerance for risk, and attitude toward the future contributes to how much they discount (or assign less value to) future money.

Your task is to discover the subconscious discount rate of two or more people you know. Follow the steps below with two or more separate people, then summarize the results in your post.

1. Talk each interviewee through the following scenario.
   1. Imagine that the U.S. government sells savings bonds that are guaranteed to pay the holder $1000 exactly one year from now.
   2. Imagine you have $999 in cash right now.
   3. Would you be willing to spend all of that money to buy the savings bond?
   4. Why (or why not)?
   5. What is the maximum price you would be willing to pay for the bond?
   6. Why is receiving $1000 in one year worth that specific amount to you today?
2. Ask your interviewee to wait for a moment while you calculate the discount rate implied by their response. r = (FV/PV) - 1
   • what they would pay = PV (express as negative if using excel or calculator)
   • 1000 = FV
   • 1 = N (or Nper)
   • solve for r (or Rate)
3. Share the rate you calculated with your interviewee and discuss.
   1. Explain that this rate is a measure of how much more they value current money than future money. It's called a discount rate because it measures how much they discount (or devalue) future money.
   2. The current market rate for bonds of that type is less than 1%.
   3. How does their personal rate compare to the market rate?
   4. If their rate is significantly higher than 1%, that's an indication that they place a particularly high value on having cash today. What would they do with an extra $999 in cash? Does their answer give any insight into why their discount rate is what it is?
4. After having both conversations, what new insight or new questions do you have about the concept of discount rates?