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3. A Treasury bond promises to 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
4. You are analyzing the value of a potential investment by
calculating the sum of the present values of its expected cash flows.
Which of the following would lower the calculated value of the
investment?
1)
The cash flows are in the form of a deferred annuity, and they total
to $100,000. You learn that the annuity lasts for only 5 rather than 10
years, hence that each payment is for $20,000 rather than for $10,000
2) The discount rate increases
3) The riskiness of the investment’s cash flows decreases