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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...

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. 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. 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 government receives no tax revenue from these businesses. 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. Dividends paid reduce the net income that is reported on a company’s income statement. b. 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. c. 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. d. Accounts receivable are reported as a current liability on the balance sheet.
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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. Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant. b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. c. Common equity includes common stock and retained earnings, less accumulated depreciation. d. The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends. e. 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. 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. b. 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. c. A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1- stock portfolio if that one stock has a beta less than 1.0. d. 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. e. 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
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This question was asked on Apr 10, 2011.

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