1. Which statement is correct if a U.S. Treasury bond pays a lump sum of $1,000 3 years from today and the nominal interest rate is 6% semiannual compounding?
a) The periodic interest rate is greater than 3%. b) The present value would be greater if the lump sum were discounted back for more periods. c) The present value of the $1,000 would be smaller if interest is compounded monthly rather than semiannually. d) The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.
2. Unsaved You are analyzing the potential value of an investment by calculating the present value of expected cash flows. Which of the following circumstances would lower the calculated value of the investment?
a) Cash flow risk decreases b) Cash flows are greater in the earlier years c) The discount rate decreases d) The discount rate increases