Question

As an investor, if you had a choice of daily, monthly, or quarterly compounding, which would...

As an investor, if you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?

How are the present values affected by changes in interest rates?

The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years?

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Answer #1

1)

As an investor i will choose daily compounding. As the compounding frequency increases, higher will be the future value. Since daily compounding has the highest number of compounding frequency, i.e., 365 days, it will have the highest future value. This is because interest gets added on interest. Interest on interest will be added 365 days which will result in a greater return.

2)

There is an inverse relationship between present value and interest rates. When interest rates increase, present value decrease. When interest rate decrease, present value increase.

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