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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

A bank offers Anita a stream of Rs 2,000 received at the end of each year for 2 years. The discount rate is 10% p.a. What is the present value of this annuity (to the nearest rupee)?

The present value is about Rs 3,471, found by discounting Rs 2,000 for one year and again for two years at 10% and adding them. The figure Rs 3,818 would wrongly treat the payments as made at the start of each year.

  1. ARs 3,471Correct
  2. BRs 3,818
  3. CRs 4,000
  4. DRs 3,306

Explanation

PV = 2,000/1.1 + 2,000/1.21 = 1,818.18 + 1,652.89 = 3,471.07, i.e. about Rs 3,471. Check: 2,000 x [1 - 1.1^-2]/0.1 = 2,000 x 1.7355 = 3,471. Rs 3,818 is the annuity-due value (3,471 x 1.1), a timing error.

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