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 greater the present value of a given lump sum to be received at some future date.

Question

Quizplus · Accepted Answer

While the first part is true as more frequent compounding periods increase the future value of an investment due to interest being calculated more often, the second part is false because the present value of a future lump sum decreases as the number of compounding periods increases, due to the discounting effect being applied more frequently.

The Greater the Number of Compounding Periods Within a Year