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? 1. The periodic interest rate is greater than 3%. 2. The periodic rate is less than 3%. 3. The present value would be greater if the lump sum were discounted back for more periods. 4. The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. 5. The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

Explanation / Answer

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

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