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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Interest rates over different time periods

A fund is credited with a constant force of interest of 6% per annum. What is the equivalent effective annual rate of discount, to two decimal places?

The effective annual discount rate is 5.82%. With a constant force of interest of 0.06, the annual discount factor is e to the power minus 0.06, which is 0.941765, so d equals one minus this, or 5.82%.

  1. A5.82%Correct
  2. B6.00%
  3. C6.18%
  4. D5.66%
  5. 5.50%

Explanation

The discount rate is d = 1 - e^(-δ) = 1 - e^(-0.06) = 1 - 0.941765 = 5.82%. The 6.18% option is the effective interest rate e^0.06 - 1, which is the wrong measure here.

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