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The discount factor for a sum received \( n \) years hence at a rate \( i \) is

  • A.\( n/(1+i) \)
  • B.\( 1/(1+i)^n \)
  • C.\( (1+i)^n \)
  • D.\( 1/(1+ni) \)

Answer: B

Multiplying a future amount by it gives the present value, and the factors fall away steeply: at ten per cent a sum ten years out is worth 0.386 of its face value. Summing the factors over the life gives the annuity factor.

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