Difficulty: Hard

Average Score: 0%

What happens to the future value of a series of payments when the compounding frequency increases?

Rationale

It increases.

When the compounding frequency increases, the future value of a series of payments also increases due to the effects of compound interest, which allows interest to be calculated more frequently on both the initial principal and accumulated interest.

A (It stays the same, only decreases in the rate will impact future value.) YOUR ANSWER

This choice incorrectly suggests that the future value remains unchanged unless the interest rate decreases. However, increasing the compounding frequency enhances the growth of the future value by applying interest more often, thereby increasing the total accumulation over time.

B (It decreases.) YOUR ANSWER

This option is incorrect as it contradicts the fundamental principle of compound interest. An increase in compounding frequency does not lead to a decrease in future value; rather, it results in a greater accumulation of interest, thus increasing the future value of the payments.

C (It increases.) CORRECT

This is the correct answer, as more frequent compounding results in interest being calculated on previously accumulated interest more often. This leads to a higher future value of the series of payments, demonstrating the power of compound interest.

D (It stays the same, only increases in the rate will impact future value.) YOUR ANSWER

This choice is misleading because it implies that future value is unaffected by changes in compounding frequency. In reality, while the interest rate does influence future value, an increase in compounding frequency also significantly contributes to the growth of future value.

Conclusion

The future value of a series of payments is positively influenced by increases in compounding frequency due to the nature of compound interest. As compounding becomes more frequent, interest is calculated more often, leading to a greater accumulation over time. Thus, the future value will indeed increase with a higher compounding frequency, in addition to any variations in the interest rate.

Related Questions

View all