IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Interest rates over different time periods
An investor is promised Rs 1,00,000 payable in 4 years. The effective annual rate of interest is 8%. What is the present value, to the nearest rupee?
The present value is about Rs 73,503, found by discounting Rs 1,00,000 for four years at 8% effective, i.e. multiplying by 1.08 to the power minus four. Using the accumulation factor instead would give the future value.
- ARs 73,503Correct
- BRs 68,058
- CRs 75,000
- DRs 1,36,049
- Rs 92,593
Explanation
PV = 100000 x 1.08^-4. 1.08^4 = 1.36049, so PV = 73,503. Rs 68,058 is 1.08^-5 (wrong exponent). Rs 1,36,049 is the accumulated value, not the present value.
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