IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Time value of money: compound interest and discounting
The effective annual rate of interest is 8%. Find the effective annual rate of discount, to two decimal places.
The effective annual discount rate is 7.41%. Using d = i/(1+i), we get 0.08 divided by 1.08, which equals 0.0741. Equivalently d = 1 - v, where v = 1/1.08 = 0.9259.
- A8.00%
- B7.41%Correct
- C7.69%
- D8.64%
- 6.40%
Explanation
d = i/(1+i) = 0.08/1.08 = 0.074074, or 7.41%. Option 8.64% comes from i(1+i), and 7.69% comes from using 1/13 by mistake, which is not linked to the data.
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