Series 79 practice questioneasyDCF Analysis
Under the mid-year convention in DCF, which adjustment is made to present value calculations?
- ADiscount all cash flows to year-end
- BApply an extra year of discounting to the terminal value only
- CDiscount projected cash flows as if received evenly throughout the year✓ Correct answer
- DIgnore terminal value in present value calculations
Explanation
Why C — Discount projected cash flows as if received evenly throughout the year
The mid-year convention assumes cash flows are received evenly, so each cash flow is discounted from the midpoint of the year. Ignoring this can overstate present values.
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