CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities
A bank's recurring-style example asks: what is the present value of Rs 1,21,000 receivable at the end of 2 years, if the discount rate is 10% per annum compounded annually?
The present value is Rs 1,00,000. Discounting Rs 1,21,000 for two years at 10% compounded annually means dividing by 1.1 squared, which is 1.21. Working forward, Rs 1,00,000 grows to Rs 1,21,000 in two years.
- ARs 1,00,000Correct
- BRs 1,01,000
- CRs 96,800
- DRs 1,10,000
Explanation
PV = FV / (1 + r)^n = 1,21,000 / (1.1)^2 = 1,21,000 / 1.21 = Rs 1,00,000. Check: 1,00,000 x 1.21 = 1,21,000. Rs 96,800 wrongly subtracts 20% simple discount from FV.
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