What is a perpetuity? 3. When r, the annual interest (or discount) rate, increases, what happens to the present value of a perpetuity? Why? What is the time value of money? Why is it so important? 5-2. The processes of discounting and compounding are related. Explain this relationship. 5-3. How would an increase in the interest rate (r) or a decrease in the holding period (n) affect the future value (FVn) of a sum of money? Explain why.