capitalization rate business definition

The rate used to convert an income or cash stream into a present-value lump sum. For example, a capitalization rate of 10% and a permanent income stream of $2,000 annually provide a present value of ^$2,000/_0.1 , or $20,000. The capitalization rate for a particular flow of income is a function of the rate of interest on Treasury bills (the risk-free rate) and the risk associated with the flow of income. A riskier investment has a higher capitalization rate and, therefore, a lower present value. Also called cap rate.