Question

Greater compounding frequency will result in a larger present value. True or false

Greater compounding frequency will result in a larger present value.

True or false

Homework Answers

Answer #1

This statement is False.

Greater compounding frequency will result in smaller positive value.

Let's understand this with the help of an example

Robert Downey Jr. will be getting $9,000,000 in a year. If the rate of interest is 12% compounded annually, the present value of the money he will be getting in a year shall be:

It means that the value of $9,000,000 to be received today is $8,035,714.29

Now, Lets see if Robert gets the same amount but the interest rates are compounded monthly. The present value shall be:

As we can see, when compounding frequency was greater (in second case), the PV value is actually less. It is $7,987,043.027 as compared to $8,035,714.29.

This is happening since the denominator(it is 1.126825) is rising in the second case as compared to first case(1.12).

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
True or False? Greater compounding frequency will result in a larger present value
True or False? Greater compounding frequency will result in a larger present value
1. A higher p-value corresponds to higher confidence in the stated result. True or False? 2....
1. A higher p-value corresponds to higher confidence in the stated result. True or False? 2. The function "errorbar()" is used to calculate standard errors of means (which are often used in plots with error bars). True or False? 3. For a given data set, the 80% confidence interval for the mean is going to be larger than the 90% confidence interval for the mean. True or False? 4. For a given data set, the 90% confidence interval for the...
1(a). (TRUE or FALSE?) The smallest compounding period is used when we do continuous compounding. 1(b).(TRUE...
1(a). (TRUE or FALSE?) The smallest compounding period is used when we do continuous compounding. 1(b).(TRUE or FALSE?) The annuity is a series of unequal cash flows, spaced unevenly over time. 1(c).(TRUE or FALSE?) Money grows over time when the interest rate is zero.
1. The future value of a present sum increases as either the discount rate or the...
1. The future value of a present sum increases as either the discount rate or the number of periods per year increases, other things held constant. True or False 2.It is always desirable to have a higher compounding frequency, regardless of the initial investment or the time horizon. True or False 3.A perpetuity is a level stream of evenly spaced cash flows that never ends. True or False
8. True or False. The net present value of one project cannot be compared to the...
8. True or False. The net present value of one project cannot be compared to the net present value of another project unless the investments required for each are equal. a. True B. False 9. True or False. Benefits for using payback for analyzing projects are a) it is easy to calculate and b) it ignores the time value of money. ​a. True ​b. False 10. True or False. In the heading of a Statement of Cash Flow, the time...
True or False? If market interest rate falls to zero, then bonds can be issued at...
True or False? If market interest rate falls to zero, then bonds can be issued at zero coupon rates and their market values would be zero. FALSE Interest rate risk for bonds decreases as bond maturity decreases and as the frequency of bond interest payments rises. TRUE The fair market value of a stock rises with the expected dividend growth rate. FALSE Companies interested in maximizing shareholder value should choose capital projects with a Net Present Value of at least...
If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than...
If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than the effective annual rate. a. True b. False
True or False 1. Suppose you are given a positive discount (or interest/compound) rate. If you...
True or False 1. Suppose you are given a positive discount (or interest/compound) rate. If you calculated the PV (present value) of a series of equal cash flows, it will always exceed the FV (future value) of the same series of cash flows. 2. All else equal, the PV (present value) of an annual ordinary annuity (i.e cash flows only happen at end of each year) increases as the frequency of compounding (# of periods per year) increases. 3. It...
TRUE OR FALSE: Present Value of Growth Opportunities (PVGO) can only take on a positive value
TRUE OR FALSE: Present Value of Growth Opportunities (PVGO) can only take on a positive value
Present Value for Various Compounding Periods Find the present value of $500 due in the future...
Present Value for Various Compounding Periods Find the present value of $500 due in the future under each of the following conditions. Do not round intermediate calculations. Round your answers to the nearest cent. 9% nominal rate, semiannual compounding, discounted back 5 years. $   9% nominal rate, quarterly compounding, discounted back 5 years. $   9% nominal rate, monthly compounding, discounted back 1 year. $  
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT