IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Time value of money: compound interest and discounting
The force of interest is a constant 5% per annum. What is the present value of Rs 100,000 payable in 3 years, to the nearest rupee?
The present value is about Rs 86,071. With a constant force of interest of 5%, the discount factor over three years is e to the power minus 0.15, about 0.8607. Treating 5% as an effective annual rate would give Rs 86,384, which is incorrect.
- ARs 86,071Correct
- BRs 86,384
- CRs 85,000
- DRs 116,183
- Rs 87,000
Explanation
With constant force δ = 0.05, v^3 = e^(-0.15) = 0.860708. PV = 100,000 × 0.860708 = 86,071. Using 1.05^-3 gives 86,384, which wrongly treats 5% as an effective rate.
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