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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Time value of money: compound interest and discounting

The force of interest is a constant 6% per annum. A sum of Rs 50,000 is due in 5 years. What is its present value to the nearest rupee?

The present value is Rs 37,041. With a constant force of interest of 6%, discounting five years gives a factor of e to the power minus 0.3, which is 0.7408, and multiplying by Rs 50,000 gives Rs 37,041.

  1. ARs 37,041Correct
  2. BRs 37,500
  3. CRs 35,000
  4. DRs 38,100
  5. Rs 41,497

Explanation

PV = 50,000*e^(-0.06*5) = 50,000*e^(-0.3) = 50,000*0.740818 = Rs 37,041. Rs 41,497 comes from using 6% effective with wrong direction, and Rs 35,000 uses simple discount.

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