CS Executive · Corporate Accounting and Financial Management · Security Analysis
A 2-year debenture of face value ₹1,000 pays an annual coupon of 8% and is redeemable at par at the end of year 2. It is priced at ₹1,000 today. A zero-coupon bond of face value ₹1,000, maturing in 2 years, is to give the same yield to maturity as this debenture. What is the approximate price of the zero-coupon bond (nearest ₹)?
The zero-coupon bond should be priced at about ₹857. A par-priced 8% debenture has a yield to maturity of 8%, so the zero-coupon bond's ₹1,000 payment in two years is discounted at 8% for two years: 1,000 divided by 1.1664.
- A₹857Correct
- B₹800
- C₹926
- D₹840
Explanation
Debenture priced at par with 8% coupon has YTM = 8%. Zero-coupon price = 1,000/(1.08)^2 = 1,000/1.1664 = ₹857.3. ₹926 discounts for only one year; ₹840 is not derived from the data.
Did you get it right without looking?
One question tells you little. A timed set on Security Analysis shows your real accuracy, how long you take and where you lose marks.
More Security Analysis questions
- Bharat Infra issues a 3-year debenture of face value ₹1,000 with a 10% annual coupon, redeemable at par at the end of year 3. If the require…
- An analyst estimates the intrinsic value of Kaveri Ltd's share at ₹480 using fundamental analysis. The current market price is ₹400. Which c…
- A bond with face value ₹1,000 and 12% annual coupon trades at ₹1,000 when the required return is 12%. Which statement is correct if the requ…
- A share of Kaveri Ltd. is expected to return 12% under CAPM. During a year, it actually returned 15%, and the market is assumed efficient. A…
- Sundaram Textiles Ltd. has just paid a dividend of Rs 10 per share. Dividends are expected to grow at 5% per year forever and shareholders r…
- Which statement about the Dow Theory principle of confirmation is correct?