IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Time value of money: compound interest and discounting
An investor deposits Rs 90,000 today and receives Rs 100,000 exactly one year later. What is the effective annual rate of discount?
The effective annual discount rate is 10.00%. Discount is the interest earned divided by the amount at the end of the year: 10,000 divided by 100,000. Dividing by the opening Rs 90,000 would give the interest rate of 11.11% instead.
- A10.00%Correct
- B11.11%
- C9.00%
- D9.09%
- 12.50%
Explanation
Discount rate d = (accumulated value - present value)/accumulated value = (100,000 - 90,000)/100,000 = 0.10, or 10%. The 11.11% option is the effective interest rate i = 10,000/90,000, which uses the wrong base (the amount at the start instead of the end).
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