CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

A higher discount rate ______ service cost and ______ interest cost.

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
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