Question

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?
a. The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
b. The periodic interest rate is greater than 3%.
c. The present value would be greater if the lump sum were discounted back for more periods.
d. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
e. The periodic rate is less than 3%.

Answer 1

Answer:

d. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

Explanation:

Since discounting will be more on lump sum $1000 at the end of 3 years than that for a 3-year $333.33 annuity.

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity .