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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models

A 2-year bond of face value Rs 1,000 pays annual coupons at 10% and is redeemed at par. It is priced to give an effective yield of 10%. Which statement is correct about the bond's price and its price one year later immediately after the first coupon, assuming the yield is unchanged?

When the coupon rate equals the yield, a bond is priced at par. Here the price is Rs 1,000 now, and with one year left the remaining payment of Rs 1,100 discounted at 10% is again Rs 1,000, so the price stays at par.

  1. APrice is Rs 1,000 now and Rs 1,100 after the coupon
  2. BPrice is Rs 1,000 now and Rs 1,000 after the couponCorrect
  3. CPrice is Rs 1,000 now and Rs 900 after the coupon
  4. DPrice is Rs 1,100 now and Rs 1,000 after the coupon
  5. Price is Rs 900 now and Rs 1,000 after the coupon

Explanation

Coupon rate equals yield, so the price equals par. Check: 100 x 1.7355 + 1000 x 0.8264 = 173.55 + 826.45 = 1000. After one coupon, remaining flow is 1,100 in one year, PV = 1,100/1.1 = 1,000.

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