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Chapter_08_sol_students

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Corporate Finance: The Core  (Berk/DeMarzo) Chapter 8  -  Valuing Bonds 8.1 Bond Cash Flows, Prices, and Yields  1)

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Which of  the following statements is false?  A)
Bonds are a  securities sold  by governments and corporations to raise money from investors today in exchange for promised future payments.  B)

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By convention  the coupon rate is expressed as an effective annual rate.  C)
Bonds typically  make two types of payments to their holders.  D)

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The time  remaining until the repayment date is known as the term of the bond.  Answer:
Explanation:

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A)
D)

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Diff: 1  Topic: 8.1 Bond Cash Flows, Prices, and Yields  Skill: Definition        2)
Which of  the  following formulas is incorrect?   A)

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Yield to  maturity for an  n - period  zero - coupon bond  = 1/ face value 1 price n - B)
Price of an  n - period bond  =    1 Coupon (1 ) YTM +   +    Coupon (1 )2 YTM +   +  ...  +   Coupon + Face (1 ) n YTM + C)

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Price of an  n - period bond  = Coupon  × 1 1 1 (1 ) n YTM YTM - +   + Face Value (1 ) n YTM + D)
Coupon  = Coupon rate x Face Value number of coupon payments per year Answer:

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Explanation:
A)

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D)
Diff: 2  Topic: 8.1 Bond Cash Flows, Prices, and Yields  Skill: Conceptual

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3)
Which of  the following statements is false?  A)

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The IRR of an  investment in a  zero - coupon bond is the rate of return that investors will earn on their money if they buy a default free bond at its  current price and hold it to maturity.  B)
The yield to  maturity of a  bond is the discount rate that sets the future value of the promised bond payments equal to the current market price  of the bond.  C)

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Financial  professionals also use the term spot interest rates to refer to the default - free zero - coupon yields.  D)
When we  calculate a  bond's yield to  maturity by solving the formula, Price of an  n - period bond  =   1 Coupon (1 ) YTM +   +    Coupon (1 )2 YTM +   +  ...  +   Coupon + Face (1 ) n YTM + the yield we compute will be a rate per coupon interval.  Answer:

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Explanation:
A)

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D)
Diff: 2  Topic: 8.1 Bond Cash Flows, Prices, and Yields  Skill: Conceptual    4)

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Consider  a zero - coupon bond with a \$1000 face value and 10 years left until maturity.  If the bond is currently trading for \$459, then the  yield to maturity on this bond is closest to:  A)
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