# View the step-by-step solution to: A Treasury bond promises to pay a lump sum of \$1,000 exactly 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?

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 smaller if interest were compounded monthly rather than semiannually.
e. The PV of the \$1,000 lump sum has a higher present value than the PV of a 3-year, \$333.33 ordinary annuity.

11
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?
a.
b.
c.

The periodic interest rate is greater than 3%.
The periodic rate is less than 3%.
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 smaller if interest were
compounded monthly rather than semiannually.
e.
The PV of the \$1,000 lump sum has a higher present value than the PV of
a 3-year, \$333.33 ordinary annuity.
13
Which of the following statements is NOT CORRECT?
The present value of a 3-year, \$150 annuity due will exceed the present value
of a 3-year, \$150 ordinary annuity.
If a loan has a nominal annual rate of 8%, then the effective rate can never
be less than 8%.
If a loan or investment has annual payments, then the effective, periodic,
and nominal rates of interest will all be the same.
The proportion of the payment that goes toward interest on a fully amortized
loan declines over time.
An investment that has a nominal rate of 6% with semiannual payments will
have an effective rate that is less than 6%.
19
Which of the following statements is CORRECT?
a.

The income of certain small corporations that qualify under the Tax Code
is completely exempt from corporate income taxes. Thus, the federal
b. All businesses, regardless of their legal form of organization, are
taxed under the Business Tax Provisions of the Internal Revenue Code.
c. Small businesses that qualify under the Tax Code can elect not to pay
corporate taxes, but then their owners must report their pro rata shares
of the firm’s income as personal income and pay taxes on that income.
d. Congress recently changed the tax laws to make dividend income received
by individuals exempt from income taxes. Prior to the enactment of that
law, corporate income was subject to double taxation, where the firm was
first taxed on the income and stockholders were taxed again on the
income when it was paid to them as dividends.
e. All corporations other than non-profit corporations are subject to
corporate income taxes, which are 15% for the lowest amounts of income
and 35% for the highest amounts of income.
20
Which of the following statements is CORRECT?
a.
b.
c.
d.

Dividends paid reduce the net income that is reported on a company’s
income statement.
If a company uses some of its bank deposits to buy short-term, highly
liquid marketable securities, this will cause a decline in its current
assets as shown on the balance sheet.
If a company issues new long-term bonds during the current year, this
will increase its reported current liabilities at the end of the year.
Accounts receivable are reported as a current liability on the balance
sheet.

e.

If a company pays more in dividends than it generates in net income, its
retained earnings as reported on the balance sheet will decline from the
previous year's balance.

21
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.

Since depreciation is a source of funds, the more depreciation a company
has, the larger its retained earnings will be, other things held
constant.
A firm can show a large amount of retained earnings on its balance sheet
yet need to borrow cash to make required payments.
Common equity includes common stock and retained earnings, less
accumulated depreciation.
The retained earnings account as shown on the balance sheet shows the
amount of cash that is available for paying dividends.
If a firm reports a loss on its income statement, then the retained
earnings account as shown on the balance sheet will be negative.

2
4
Which of the following statements is CORRECT?
a.

If a security analyst saw that a firm’s days’ sales outstanding (DSO)
was higher than the industry average and was also increasing and
trending still higher, this would be interpreted as a sign of strength.
b. If a firm increases its sales while holding its accounts receivable
constant, then, other things held constant, its days’ sales outstanding
(DSO) will increase.
c. There is no relationship between the days’ sales outstanding (DSO) and
the average collection period (ACP). These ratios measure entirely
different things.
d. A reduction in accounts receivable would have no effect on the current
ratio, but it would lead to an increase in the quick ratio.
e. If a firm increases its sales while holding its accounts receivable
constant, then, other things held constant, its days’ sales outstanding
will decline.
32
Which of the following statements is CORRECT?
a.

b.
c.
d.
e.

A large portfolio of randomly selected stocks will always have a
standard deviation of returns that is less than the standard deviation
of a portfolio with fewer stocks, regardless of how the stocks in the
smaller portfolio are selected.
Company-specific (or diversifiable) risk can be reduced by forming a
large portfolio, but normally even highly-diversified portfolios are
subject to market (or systematic) risk.
A large portfolio of randomly selected stocks will have a standard
deviation of returns that is greater than the standard deviation of a 1stock portfolio if that one stock has a beta less than 1.0.
A large portfolio of stocks whose betas are greater than 1.0 will have
less market risk than a single stock with a beta = 0.8.
If you add enough randomly selected stocks to a portfolio, you can
completely eliminate all of the market risk from the portfolio.

34
Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2

average stocks. Assuming the market is in equilibrium, which of the
following statements is CORRECT?
Jane’s portfolio will have less diversifiable risk and also less market risk
than Dick’s portfolio.
The required return on Jane’s portfolio will be lower than that on Dick’s
portfolio because Jane's portfolio will have less total risk.
Dick's portfolio will have more diversifiable risk, the same market risk, and
thus more total risk than Jane's portfolio, but the required (and expected)
returns will be the same on both portfolios.
If the two portfolios have the same beta, their required returns will be the
same, but Jane’s portfolio will have less market risk than Dick’s.
The expected return on Jane’s portfolio must be lower than the expected
return on Dick’s portfolio because Jane is more diversified.

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