Economics Time Value Of Money Questions
Discount rate frequency refers to how often the discount rate is applied to future cash flows in the calculation of the time value of money. The discount rate is the rate of return or interest rate used to determine the present value of future cash flows.
The impact of discount rate frequency on the time value of money is that the more frequently the discount rate is applied, the lower the present value of future cash flows will be. This is because the discount rate accounts for the opportunity cost of investing money in the present rather than in the future.
For example, if the discount rate is applied annually, the present value of future cash flows will be lower compared to applying the discount rate semi-annually or quarterly. This is because the discount rate is applied more frequently, resulting in a higher opportunity cost of investing money in the present.
In summary, discount rate frequency affects the time value of money by determining how often the discount rate is applied, which in turn affects the present value of future cash flows. The more frequently the discount rate is applied, the lower the present value will be.