The discount rate used in present value calculations is based on what type of yield?

The discount rate used in present value calculations is primarily based on a risk-adjusted yield. This concept is crucial as it reflects both the time value of money and the risk associated with different investments. By incorporating the risk factor, the risk-adjusted yield ensures that the discount rate accurately represents the potential returns that an investor would require to compensate for the uncertainty of the cash flows.

When assessing the present value of future cash flows, investors must consider not only the expected returns from those cash flows but also the inherent risks in achieving those returns. This approach helps in evaluating the attractiveness of an investment relative to its risk. As such, using a risk-adjusted yield as the basis for the discount rate allows for a more nuanced and accurate valuation of future cash flows.

In contrast, guaranteed yield implies certainty of returns, which does not account for risk. Average market yield references general market performance without specific risk considerations, while historical yield focuses on past performance rather than present or future risk factors. Hence, these alternatives do not provide the comprehensive perspective that the risk-adjusted yield offers for present value calculations.