NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Mr. Iyer will receive Rs 1,00,000 exactly 3 years from now. If the discount rate is 10% per annum compounded annually, what is the present value of this amount (nearest rupee)?
The present value is Rs 75,131. Discount the Rs 1,00,000 by (1.10) cubed, which is 1.331, because it is received after three years at 10% compounded annually. Discounting for fewer periods gives higher, incorrect values.
- ARs 75,131Correct
- BRs 70,000
- CRs 90,909
- DRs 82,645
Explanation
PV = 1,00,000 / (1.10)^3 = 1,00,000 / 1.331 = Rs 75,131. Check: 75,131 x 1.331 = 1,00,000. Rs 82,645 discounts for only 2 years, and Rs 90,909 for only 1 year. Rs 70,000 wrongly subtracts 10% a year in simple fashion.
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