IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Equation of value
The nominal rate of interest is 12% per annum convertible quarterly. What is the equivalent effective annual discount rate, to 4 decimal places?
The effective annual discount rate is 0.1115. First the effective interest rate is 1.03 to the fourth power minus 1, or 0.1255, and then d equals i divided by 1 plus i. The figure 0.1255 is the interest rate, not the discount rate.
- A0.1255
- B0.1000
- C0.1115Correct
- D0.1200
- 0.1068
Explanation
Effective annual rate i = 1.03^4 - 1 = 0.125509. d = i/(1+i) = 0.125509/1.125509 = 0.1115. The 0.1255 option is the effective interest rate, not the discount rate.
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