- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 11. Employee Compensation: Post-Employment and Share-Based
- Subject 3. Analysis of Pension Plan Disclosures
CFA Practice Question
A higher discount rate ______ service cost and ______ interest cost.
B. increases, increases.
C. decreases, decreases.
A. decreases, increases.
B. increases, increases.
C. decreases, decreases.
Correct Answer: A
A higher (lower) rate reduces (increases) service cost and increases (reduces) interest cost. Although the effect on the service cost is offset in part by the interest cost effect, the effect on the service cost is normally much greater. Thus, in most cases, a higher discount rate reduces reported pension cost.
User Contributed Comments 2
| User | Comment |
|---|---|
| ehc0791 | interest cost = service cost * discount rate, it is not necessary that the interest cost will be lower. |
| C2inOC | ehc0791: You may want to check that. Interest Cost = Previous PBO * discount rate |