Let

d =  the discount rate per period
S = the value of an obligation at the end of n periods
P =  the present value of the obligation

Then the formula for the present value of an obligation discounted as bank discount is given by

P = S (1 – d ) ⁿ ,

Example. Find the present value and discount on Rs.1000 due in 3 years at 6% rate of discount, convertible semiannually.

Solution. Since the rate of discount is convertible semiannually, the present value is given by

P = S (1- d ) ⁿ,

where S = 1000, d = 0.03 and n = 6. Hence

P = 1000 (0.97)6 = 1000 (0.83297) = Rs. 832.97

and

discount = 1000 – 832.97 = Rs. 167.03

For more help in Present Value At a Discount Rate click the button below to submit your homework assignment