Question Details

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


1.	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 periodic interest rate is greater than 3%.
b.	The periodic rate is less than 3%.
c.	The present value would be greater if the lump sum were discounted back for more periods.
d.	The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
e.	The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
	
2.	Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

a.	The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
b.	A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
c.	A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
d.	If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
e.	Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.  Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
	
3.	Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

a.	The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
b.	A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
c.	A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.
d.	If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
e.	Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.  Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
	
4.	Which of the following statements is CORRECT?

a.	The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
b.	If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.  
c.	If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d.	The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e.	An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

5.	Which of the following statements is CORRECT?		

a.	The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
b.	If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.  
c.	If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d.	The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e.	An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.





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