How is the IRS discount rate determined?
The IRS Discount Rate (or AFR) equals 120% of the annual mid-term applicable federal rate, rounded to the nearest 0.2%.
There are many "applicable federal rates" all based on the average market yield of US obligations: Treasury Notes, Bills, and Bonds. "Annual mid-term" means that the AFR we want is the average annual yield percentage on instruments with remaining maturities of three to nine years (medium-term bonds).
In short, on a specific day each month, the IRS averages the annual market yield over the past 30 days of medium-term Treasury instruments, multiplies by 1.2, rounds to the nearest 0.2%, then publishes the result as the IRS Discount Rate (some call this number the charitable mid-term federal rate or CMFR).
