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IAI Actuarial Core Principles · Business Finance · Key principles of finance

A bond pays Rs 5,000 at the end of each year for 3 years. The discount rate is 10% per annum. Annuity factor for 3 years at 10% is 2.4869. What is the present value?

The present value is Rs 12,434.50. Payments at each year-end are an ordinary annuity, so multiply the Rs 5,000 payment by the 3-year, 10% annuity factor of 2.4869. Multiplying by an extra 1.10 would assume payments at the start of each year.

  1. ARs 15,000
  2. BRs 13,500
  3. CRs 12,434.50Correct
  4. DRs 11,300
  5. Rs 13,675.90

Explanation

PV = 5,000 × 2.4869 = Rs 12,434.50. Rs 15,000 ignores discounting. Rs 13,675.90 treats it as an annuity due (12,434.50 × 1.10), which is wrong for end-of-year payments.

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