Effective Interest Rates and Market Discount Curves in CECL and Pricing

Summary

The document asks how the discount rate used in Current Expected Credit Loss accounting differs from rates used in market pricing. It describes the CECL discount rate as an effective interest rate (EIR), represented by a single number, and contrasts this with pricing practice, where market instruments such as overnight indexed swaps are used to construct a term structure of discount rates.

The central issue is whether these rates serve different purposes and how their estimation should be selected for accounting versus trading. The document gives no answer, methodology, numerical example, or supporting evidence; it frames a question for practitioners to clarify. It therefore identifies a distinction between an accounting measure and market-based discounting but does not establish the applicable CECL rules or prescribe a curve-building approach. Readers would need authoritative accounting guidance and instrument-specific pricing conventions to resolve those questions.

Key ideas

• The document contrasts a single effective interest rate used in its description of CECL with a market discount curve used in pricing.
• Market curves may be estimated from traded instruments such as overnight indexed swaps.
• Accounting and trading discount rates may reflect different purposes and estimation methods.
• The document poses the question without providing a method, conclusion, or specific accounting guidance.

Tags

# Which discount rate to use?


# Which discount rate to use?












I am confused on various ways the discount rate can be estimated. For example, in `CECL` (Current Expected Credit Loss methodology) the discount rate for future cashflow is mandated to be used as something called Effective Interest Rate i.e. `EIR`, which is a single number.

However for typical Pricing model, the discount rate is to be estimated from various market traded contracts like OIS etc. In this case, we typically get a term structure of discount rate. Also the way these 2 different ways the discount rates can be estimated, are fairly different from my understanding.

Could you please opine if they are indeed different? And specific way of estimation to be used for the accounting purpose like CECL or actual trading.

Any pointer will be very helpful

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