Question

If interest is compounded semi-annually rather than annually, then:

a. future values and present values will both be higher

b. future values and present values will both be lower

c. future values will be lower and present values will be highe

r d. future values will be higher and present values will be lower

Answer 1

d. future values will be higher and present values will be lower

When calculating compound interest the number of compounding periods makes a significant impact.Generally higher the number of compounding periods , greater the amount of compound interest.

So When Compounding is semi annual interest will be higher and Future value will be higher and

when compounding for present value similarly compounding semi annually will give lesser present value

Suppose we compund 100$ annually @ 10% Present Value = 1/1.10 = 90.90$

If we compund semi annually $100 then ($100/1.05)² = $90.70

So Compunding semi annually will give higher future value and lesser present value.