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MGT201 Financial Management Graded Discussion Board (GDB) NO.1 Solution and Discussion Fall 2013 Due Date: November 22, 2013

Topic for Discussion: “Present Value and Discounting?”

GDB Question:

Few days ago, the State Bank of Pakistan (SBP) has raised interest rate up to 9.5 percent from 9.0 percent, in line with requirements set by the International Monetary Fund. This increase was in a need to curtail rising inflation by tightening the flow of liquidity through higher interest rate. You were planning to purchase an insurance policy. What will be the effect of this rise in interest rate on:

a)        Present value of insurance policy

b)       Future value of insurance policy

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Replies to This Discussion

Thanks Hira

So Finally ye pv aur fv k itny sary comments read krny k bad..  

mere mind me ye bat ati ha  k agr interest rate 9.0 se 9.5 (increase) ho rhy then present value decrease hogi and future value increase hogi.. Am Right?  koi example wagera b deni ya aise hi.....??

final answer for present value 100% correct 

When the interest rate is increase then present value decrease 

I am confused about the future value but I am sure the present value decrease when interest rate increase

final answer for future value 100% correct  

if present decrease then future increase. OK
best of luck  

pv value constant rahe ge naa

chand log ase hote ha jin ko sari umar aqal ni a sakti

jb btaya ha k 100 %correct ha to or ap ko kya chaya tha

yes absolutely right

WELL DONE

ppllllllzzzzzzzzzzz plzzzzz dnt copyyy it just an idea .....mera bhi zero a jye ga

 

Present value of insurance policy

If interest rate is increases then the present value of the insurance policy will be decrease and future value will be increases. For example suppose, Earning after twelve years or a Future value is 200 $, years to maintain are 12 and rate of interest is 9.0% then by using the present value formula after calculating the present value will be 71 $.Now if our years and Earning remain same but we increase our rate of interest 9.5% then calculation of present value will be 67$. So we can see as the interest rate increase the present value of invest policy will decreases.

 b)       Future value of insurance policy

If interest rate is increases then the future value of the insurance policy will be increases. for example let suppose if the investment present value of insurance policy is 200$,the interest rate is 9.0% and the duration of year to maintain investment is 12 year then by  calculating its future value,  the Future value is 562$.Now if our years and investment remain same but  we increase our interest rate 9.5 %then after calculation the future value is 594$.which is grater then 562$ previous future value  So as the conclusion we can see as the interest rate increase the future value of insurance policy will also increase The Formula of present 

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