IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Interest rates over different time periods
Tata Capital offers a deposit that pays Rs 1,00,000 in exactly 3 years. The effective annual rate of interest is 8%. What is the present value of this payment, to the nearest rupee?
The present value is about Rs 79,383. Discounting Rs 1,00,000 over three years at 8% effective annual interest means multiplying by 1.08 to the power minus three, which is 0.793832. Using the accumulation factor instead would give the future value, not the present value.
- ARs 79,383Correct
- BRs 80,000
- CRs 75,000
- DRs 1,25,971
- Rs 76,000
Explanation
PV = 100000 × 1.08^-3 = 100000 / 1.259712 = 79,383. Option Rs 80,000 uses simple discounting over a shorter horizon and ignores compounding. Rs 1,25,971 is the accumulated value, not the present value.
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