Question

A Treasury bond's price is comprised of which components?

I. A lump-sum cash flow

II. An annuity due

III. An ordinary annuity

IV. A perpetuity

	a.	I and II only
	b.	I and IV only
	c.	II and III only
	d.	I only

Answer 1

Option a. is correct

A Treasury bond's price is comprised of:

I. A lump-sum cash flow in the form of face value at maturity

II. An annuity due in the form of periodic interest payments

The other answers are incorrect for the following reasons:

• In a perpetuity the cash flows occur forever, but in Treasury bonds, the cash flows do not occur after the maturity
• The periodic interests make an annuity due