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The frequency of cash flows and reinvestment can have a significant impact on both present value and future value calculations. Based on your understanding of these relationships, as we increase the frequency of discounting (compounding), which of the following relations would we expect to hold true, all else equal:

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Relations that, given all other factors being equal, we would anticipate remaining true (greater future values).

What impact does compounding more frequently have on present values?

A higher compounding frequency for the present value results in a lower present value. This is due to the fact that more compound interest is gained, which lowers the amount that needs to be saved today in order to be equivalent to a given amount in the future.

What impact do changes in interest rates have on present values?

Effect of Discount Rate on Present Value: Future cash flows' present values might be impacted by the interest rate or discount rate. The present value is higher if the discount rate is lower (signifying a lower risk and a lower necessary return), and vice versa.

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