Discount unwind is a calculation that determines the impact of a change in the discount rate on the fair value of a fixed-income security. For instance, if a bond has a $1,000 face value, a 5% coupon, and a 10-year maturity, and interest rates rise from 5% to 6%, the bond’s fair value will decrease.
Discount unwind is important because it helps investors understand how changes in interest rates will affect their portfolios. It can also be used to manage risk and to make informed investment decisions. One key historical development in discount unwind is the introduction of the Black-Scholes model in 1973, which provided a more accurate way to calculate the fair value of options.