A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. T

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?
Answer

a. The periodic interest rate is greater than 3%.

b. The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

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.

Explanation / Answer

ANSWER - OPTION (d) (since discounting will be more on lump sum $1000 at the end of 3 years than that for a 3-year $333.33 annuity)

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