The degree of concessionality of a loan is measured by its “grant element”. The grant element is defined as the difference between the loan’s nominal value (face value) and the sum of the discounted future debt-service payments to be made by the borrower (present value), expressed as a percentage of the loan’s face value. Whenever the interest rate charged for a loan is lower than the discount rate, the present value of the debt is smaller than its face value, with the difference reflecting the (positive) grant element of the loan.
It is defined as an interval between the commitment date and the date of the first payment of principal (DAC, OECD).
It is defined as an "interval between the commitment date and the first repayment date minus the interval between two successive repayment" (DAC, OECD).
Discount rates are used by the IMF and the World Bank for two main purposes in the context of debt policy for Low Income Countries (LICs):
- (i) to assess the concessionality of a loan (the “grant element” calculator) in the implementation of the Bank’s Non-Concessional Borrowing Policy and the Fund’s debt limits policy; and
- (ii) to calculate the present value of debt in the context of the LIC debt sustainability framework (DSF).
On October 11, 2013, the Executive Boards of the Fund and of the Bank adopted a new, simplified methodology setting a single, fixed, unified discount rate to calculate the grant element of individual loans. It replaces the previous discount rate system based on currency-specific “commercial interest reference rates” (CIRRs) that was further differentiated according to maturity.
The new discount rate is set at 5 percent and will be calculated based only on the USD value of the loan only.