Just wanted to be 100% certain: Interest cost equals the discount rate X the beginning PBO If discoutn rate goes down, then interest rate should go down as well.
correct
The interesting part is on Schweser it state otherwise.
Not necessarily. It could go either way. Reference a question from the 2006 exam where a decrease in the discount rate caused the interest cost to go up. It is because the PBO is increased by the decrease in the discount rate.
yeah i remember that i think its b/c the lowered discount rate will also lower the PBO thus dropping the interest expense confusing i know
It does say that Interest cost equals the discount rate X the beginning PBO which means the change in discount rate will not impact the begining PBO which is based on the previous unadjusted discount rate
Wouldn’t lowering discount rate increase the PBO? aladak Wrote: ------------------------------------------------------- > yeah i remember that > > i think its b/c the lowered discount rate will > also lower the PBO thus dropping the interest > expense > > confusing i know
Answers from Schewser The assumed discount rate used to determine the end-of-the-year benefit obligation decreased from 6.75% in 2002 to 6.25% in 2003. A decrease in the discount rate will most likely increase interest cost and increase service cost. Recall that interest cost equals the discount rate times the beginning PBO. Interest cost will increase because the effect of the lower discount rate will be smaller than the effect of the increase in the PBO. (Study Session 6, LOS 24.b)