Idont understand why would an increase in the discount rate reduce interest cost unless the plan is matured, can anyone explain the relation between maturity of the plan and the used discount rate ?
PVLiabs * Discount Rate = Interest cost.
If Discount Rate drops - PVLiabs goes up - but corresponding the Interest Cost drops - unless this is at maturity - when the full PVLiabs is due, no matter what.
still cant get it , would u mind providing further explanation ?
Suppose that the future value of your pension benefits is $10,000,000, due in 20 years.
- If you use a discount rate of 5%, the PV is $3,768,895 (work it out), and the interest charge is $188,445 (again, work it out).
- If you use a discount rate of 8%, the PV is $2,145,482 (work it out), and the interest charge is $171,639 (again, work it out).
The higher interest rate is more than offset by the lower beginning value.
(Note that after about 4 years, this reverses, and the 8% discount rate has higher interest charges than the 5% discount rate thereafter.)
now I got it , thanks for help
My pleasure.