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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Time value of money: compound interest and discounting

An investor is promised a payment of Rs 1,50,000 in exactly 4 years. The effective annual interest rate is 6% throughout. What is the present value of this payment, to the nearest rupee?

The present value is about Rs 1,18,814. It is found by multiplying the payment by the discount factor 1.06 raised to the power minus 4, because a payment due in four years is worth less today under compound interest at 6% per annum.

  1. ARs 1,18,814Correct
  2. BRs 1,18,000
  3. CRs 1,89,372
  4. DRs 1,20,000
  5. Rs 1,13,430

Explanation

PV = 150000 × 1.06^-4. 1.06^4 = 1.262477, so PV = 150000/1.262477 = 118,814. Rs 1,89,372 wrongly accumulates instead of discounting. Rs 1,20,000 uses simple discount at 6% for 4 years (150000 × 0.8 ), which is wrong.

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