The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date. a. True b. False
Social Studies · High School · Tue Nov 03 2020
Answered on
a. True
The statement is true. When compounding occurs more frequently within a year, it generally leads to a higher future value for a lump sum investment at Time 0. This is due to the compounding effect being applied more frequently, resulting in the accumulation of interest on interest.
Conversely, the present value of a given lump sum to be received at some future date is smaller when compounding occurs more frequently. This is because the discounting effect (reducing the value of future cash flows to their present value) is more pronounced with higher compounding frequencies.
In finance, this concept is related to the time value of money and is commonly used in calculations involving interest rates, present value, and future value.