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I'm trying to answer the hypothetical question posted below (for educational purposes) but I'm very confused about its wording regarding the interest rate. If I assume that the interest is compounded monthly (I'm guessing this is what the question is trying to state), I obtain that the value of $1 today is equivalent to $1.05^3 three months from now, hence the present value of the stock is $37/1.05^3 and so the quoted price for two months from now is going to be $37/1.05 multiplying through by 1.05^2. Is this the correct interpretation? I'm just lost in terminology, obviously this isn't even a math question really.

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  • What does the textbook say about similar problems in that chapter? Sep 21, 2020 at 10:04
  • There is no mention about what "compounding for longer periods" means. Is my calculation correct based on the interpretation I give?
    – qp212223
    Sep 21, 2020 at 20:16

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