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How compounding frequency (annual, semi-annual, quaterly etc.) affects PV?

How compounding frequency (annual, semi-annual, quaterly etc.) affects PV?
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Answer #1

We know that effective interest rate is given by

We can see that as compounding frequency increases, effective interest rate also increases. It means that effective interest rate will be higher with higher compounding frequency as compared to effective interest rate with lower compounding frequency. for example effective interest rate is higher in case monthly compounding as compared to annual compounding.

PV of cash flows depends finally upon effective interest rate, We know that PV is lower in case of higher interest rate and is higher in case of lower interest rate.

So, we can say that PV is lower in higher compounding frequency and higher in case of lower compounding frequency.

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