Calculating discount factor from yield curve is a mathematical technique to determine the present value of future cash flows by incorporating the relationship between interest rates and time to maturity. It involves interpolating a discount factor, representing the present value of a unit of currency received at a specified future date, from a yield curve.
The calculation of discount factors plays a crucial role in finance, particularly in the valuation of bonds, mortgages, and other fixed-income securities. By accurately determining present values, investors can make informed decisions about the attractiveness of these investments.