It is the interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank. Different types of loans are available from Federal Reserve Banks and each corresponding type of credit has its own discount rate.  

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.

A simple explanation of the discount rate used in DCF analysis is as follows. Let's say you expect $1,000 in one year. To determine the present value of this $1,000 (what it is worth to you today), you would need to discount it by a particular interest rate. Assuming a discount rate of 10%, the $1,000 in a year's time would be equivalent to $909.09 to you today (1,000 / [1.00 + 0.10]). If you expect to receive the $1,000 in two years, its present value would be $826.45.