Question

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

Answer 1

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

FV = PV * (1 + r)^n

As r and n increases the future value increases

2.It is always desirable to have a higher compounding frequency, regardless of the initial investment or the time horizon.

TRUE

As the compounding frequency increases, our initial investment is worth more in the future.

3.A perpetuity is a level stream of evenly spaced cash flows that never ends.

TRUE

A perpetuity has cash flows that are equal and occurs at evenly spaced intervals and cash flows continue forever.