Which of the following would best describe what would happen to the time value at the same nominal annual rate of a cash flow as the number of interest compounding periods increases?

A) Both the present value and future value would increase.

B) The present value would decrease and the future value would increase.

C) Both the present value and future value would decrease.

D) The present value would increase and the future value would decrease.

Question

Business

Gideon Jenkins

30 May, 11:20

Which of the following would best describe what would happen to the time value at the same nominal annual rate of a cash flow as the number of interest compounding periods increases?

A) Both the present value and future value would increase.

B) The present value would decrease and the future value would increase.

C) Both the present value and future value would decrease.

D) The present value would increase and the future value would decrease.

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Answers (1)

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Kendall Lane · Answer 1

A) Both the present value and future value would increase.

Explanation:

If the compounding frequency increases, then both the present value and the future value will increase because the effective annual rate will increase. E. g. interest used to be compounded every 6 months, now it is compounded monthly.

Both the present value and the future value vary jointly, if the present value decreases, then the future value will also decrease, and vice versa.