Discount rate
SI =PRT/100, A= P+SI
Simple discount
P=A –Simple discount
SD = Adt = Amount*discount rate*time
P = A-SD
1. Find the simple discount and the present value of ₹ 2000 loan for six
months at 8%.
SD = Adt = 2000*.08*0.5 =
SD = 80
P =A –SD = 2000-80 =1920
A= P(1+i)n = compounding
P = A(1-d)n = present value at discount rate
D =A-P
A=Pert = continuous compounding
P=Ae-rt = continuous discounting
2. Find the present value and discount on ₹3000 due in 4 years at 8% discount
rate, discounted annually.
0 8% 4
3000
P =3000(1-0.08)4
P= 3000 (0.92)4 = 3000*.7163 =2149
D = 3000-2149 = ₹851
Let x =(0.92)4
Taking log on both sides,
Log x = log(0.92)4
Log x = 4 log (0.92)
0.92 = 92 * 10-2
Log (92 *10-2) = log (a*b) = log a + log b
Log 92 + log 10-2 = 1.9638 + (-2 log 10) = 1.9638 -2 = -0.0362
Log x = 4 * (-0.0362)
Log x = (-0.1448)
X= Antilog (-0.1448)
X = antilog (-1+1-0.1448)
X= antilog (-1 + .8552)
X= .7164
3000*0.7164
3. Find the present value and discount on ₹2000 due in 4years at 8% discount
rate, convertibly half yearly.
P =A (1-d/m)n, m=2, d =0.04, n= 8
P =2000(1-.04)8
P=2000(0.96)8
Let x = (0.96)8
Taking log on both sides,
Log x = log (0.96)8
Log x = 8 log (0.96)
Log x = 8 (log 96*10-2)
Log x = 8 ((log 96 + (-2) log 10))
Log x = 8(1.9826-2)
Log x = 8(-0.174)
Log x = -0.1392
X =antilog (-0.1392)
X=antilog (-1+1-0.1392)
X=antilog (-1 + 0.8608) =7244+13 = 7.257 *10 -1=0.7257
X=0.7257
2000*0.7257 = 1451
D=2000-1451 = 549
4. If the present value of ₹6000 due in 2 years at a certain nominal rate of
discount, convertible quarterly is ₹5536.47. find the rate of discount
P=5536.47
A=6000
T=2, m= 4, n=8
Quarterly discounting = d/4
P=A(1-d/4)8
5536.47=6000(1-d/4)8
5536.47/6000 = (1-d/4)8
0.9227=(1-d/4)8
Taking log on both sides,
Log(0.9227) =log(1-d/4)8
Log(92.27*10-2) = 8 log (1-d/4)
Log 92.27 + log 10-2 = 8 log (1-d/4)
1.9650 -2 = 8 log log (1-d/4)
-0.035 = 8 log (1-d/4)
-0.035/8 = log (1-d/4)
Log (1-d/4) = -0.004375
1-d/4 = antilog (-0.004375)
1-d/4 = -1+1-0.004375
1-d/4 = -1 + 0.995625
1-d/4 = antilog (-1 + 0.995625)
1-d/4 = 9.900*10-1 = 0.9900
1-d/4 = 0.9900
1-0.9900 = d/4
0.01 = d/4
D=0.01*4 = 0.04
D=4%
5. Wat is the PV of ₹2000 due after 5 years from now if the discount is
convertible continuously at a discount rate of 8%?
P=Ae-rt
A=2000
T=5 yrs
R=8%=0.08
P=2000e(-0.08*5)
P=2000e(-0.40)
P=2000*0.6703 = 1340.6
re = (1+r/m)m – 1
Relationship between nominal discount rate and effective discount rate
de=1-(1-d/m)m
de= 1-e-d
6. Find the effective rate of discount equivalent to the nominal rate of
discount 9% converted (a) monthly, (b) semi-annually, (c) quarterly (d)
continuously
de=1-(1-d/m)m
b. de=1- (1-0.09/2)2
de=1 – (0.955)2 = 1-.912025= .0879=8.79%
c. de=1-(1-0.09/4)4 = 1- (1-0.0225)4 = 1-(0.9775)4 = 1-0.9129= 0.0871= 8.71%
d. 1-e(-0.09) = 1-0.9139 = 0.0861= 8.61%
7. Find the nominal rate of discount convertible semi-annually equivalent to the
effective rate of discount 6%.
de=1-(1-d/m)m
m=2, de=6%
0.06 = 1 – (1-d/2)2
(1-d/2)2 = 1-0.06
(1-d/2)2 = 0.94
Taking log on both sides
2log (1-d/2) = log 0.94
2log (1-d/2) = log(94*10-2)
2log (1-d/2)= log 94 + (-2)log 10 = 1.9731 – 2 = -0.0269
Log(1-d/2) = -0.01345
1-d/2= antilog(-0.01345) = -1+1-0.01345 = -1 + 0.98655
1-d/2 = antilog (-1 + 0.98655) = 9.694 * 10 -1 = 0.9694
1-0.9694 = d/2
0.0306 = d/2
D=0.0612 = 6.12%
1-d/2 = √0.94
1-d/2 = 0.9695
1-0.9695 = d/2
0.03046 = d/2
0.03046*2 = d
D = 6.09%
7. What nominal rate of discount convertible continuously will be equivalent
to the effective rate of discount 7%?
De=1-e-d = 0.07 = 1-e-d
1-0.07 = e-d
0.93 = e-d = since the table value in e-d is 0.9323 across 0.07 = therefore, the
approximate nominal rate of discount is 7%
9. What nominal rate of discount convertible half yearly which is equivalent to the
nominal rate of discount 8% convertible quarterly?
de=1-(1-d1/m)m, m=2
de=1-(1-d2/m)m, m=4, = 1-(1-0.08/4)4
1-(1-d1/m)m = 1-(1-0.08/4)4
1-(1-d1/2)2 =1 –0.9224
1-(1-d1/2)2 = 0.0776
1-0.0776 = (1-d1/2)2
0.9224 = (1-d1/2)2
0.9604 = 1- d1/2
d1/2 = 1- 0.9604
d1 = .0396 * 2 = 0.0792 = 7.92%
relationship between rate of discount and rate of interest
100, d=6%, 94
6/94*100 = 0.063829 = 6.38%
r=d/(1-d)= this is the relationship wich helps in calculating rate of interest
corresponding to rate of discount
d=r/(1+r) = this relation is used to find the rate of discount corresponding to the
rate of interest.
10. Find the rate of discount corresponding to the rate of interest 6%.
d=r/(1+r)
d= 0.06/(1+0.06) = 0.06/1.06 = 5.66%
11. find the rate of interest corresponding to a rate of discount of 8%.
r=d/(1-d)
r=0.08/(1-0.08) = 0.08/0.92 = 0.0869= 8.69%
