The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.
For a given single sum invested at 8% for 4 years, how will the future value be affected if the compounding period is changed from annual to quarterly?
A)The future value will decrease.
B)The future value will increase.
C)The future value will stay the same.
D)There is not enough information to determine the impact.

Question

Quizplus · Accepted Answer

Using Table 9-1, we find that the future value factor for 8% for 4 years with annual compounding is 1.3605. Therefore, the future value of the investment would be 1.3605 times the initial investment. 
Using Table 9-4, we find that the future value factor for 8% for 4 years with quarterly compounding is 1.3769. Therefore, the future value of the investment with quarterly compounding would be 1.3769 times the initial investment. 
Since 1.3769 is greater than 1.3605, the future value will increase if the compounding period is changed from annual to quarterly.

The Solution to This Problem Requires Time Value of Money