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Unformatted text preview: Chapter 6 Bonds Answers to Chapter 6 Review Questions 1. A bond is like a loan because of the structure of the payments. The bond pays a regular coupon payment, which closely resembles an interest payment on a loan. At the maturity of the bond, the par value is paid, which is like repaying the principal of the loan. Any missed payment on a bond is considered a default on the loan, similar to defaulting on a loan. 2. Like any investment, a bond requires an initial cost (the price of the bond) and results in future cash flows (coupon payments and par value) to the investor. An investor will discount the future cash flows to ensure that the initial investment earns an adequate rate of return. The return is in the form of future coupon payments and par value payment that have a present value at least as great as the price of the bond. 3. The internal rate of return is the single discount rate that implies that the PV of the benefits of an investment is equal to the PV of the costs of the investment. The yield to maturity is the internal rate investment is equal to the PV of the costs of the investment....
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This note was uploaded on 08/26/2010 for the course FINA FINA111 taught by Professor Lynnpi during the Spring '09 term at HKUST.
- Spring '09