Why must terminal values be adjusted when applying the mid-year convention?

Terminal values must be adjusted when applying the mid-year convention to ensure that cash flows are appropriately aligned with the timing of the valuation. The mid-year convention shifts the projection of cash flows forward by half a year, which means that the cash flows, including the terminal value, are recognized earlier than they would be under a standard year-end calculation.

By adjusting the terminal value, you make sure that the valuation reflects the time value of money accurately, thereby enhancing comparability between the calculated cash flows and the terminal value. This adjustment is crucial for maintaining accuracy when discounting future cash flows back to their present value, ensuring that every component of the valuation is treated consistently in relation to the timing of the cash flows.

The other considerations listed in the options are less pertinent to the immediate need for adjusting terminal values in this specific context of valuation timing with the mid-year method.