Question

1. When payments are made/received in periods less than one year (e.g., monthly), the present value and future value formulas:                                                                                    
   1. are not adjusted
   2. are adjusted by increasing the number of periods (“n”) to reflect more payments
   3. are adjusted by decreasing the rate (“r”)
   4. are adjusted by increasing the number of periods (“n”) and decreasing the rate (“r”) per period

Answer 1

When payments are made/received in periods less than one year (e.g., monthly), the present value and future value formulas are adjusted by increasing the number of periods (“n”) and decreasing the rate (“r”) per period . This is because the time period will be in months which will be higher than the count of number 1 as year. Also, we need to reduce the r from annual discount factor to monthly discount factor.

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