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The Greater the Number of Compounding Periods Within a Year

question 52

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The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.


Definitions:

Future Value

The value of an investment or asset at a specified future date based on assumed rates of growth or interest.

Present Value

The valuation at present of a future sum of money or sequence of cash inflows, applying a specified rate of return.

Interest Rate

The percentage of a sum of money charged for its use, reflecting the cost of borrowing money or the return on invested savings.

Real Interest Rate

The interest rate adjusted for inflation, representing the real cost of borrowing or the real yield to lenders and investors.

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