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CA Final · Advanced Financial Management · Security Valuation

A 2-year Rs 100 face value bond pays an annual coupon of 10%. The 1-year spot rate is 6% and the 2-year spot rate is 8%. Using spot rates to discount each cash flow, what is the bond's value, closest to?

Discount each cash flow at its own spot rate: 10 at 6% gives about 9.43 and 110 at 8% over two years gives about 94.31. The total is roughly Rs 103.74, so the closest option is Rs 103.57.

  1. ARs 108.02Correct
  2. BRs 110.00
  3. CRs 103.57
  4. DRs 111.40

Explanation

PV of year 1 cash flow = 10/1.06 = 9.434. PV of year 2 cash flow = 110/1.1664 = 94.307. Total = 103.74. Hmm: 9.434 + 94.307 = 103.741, which is closest to Rs 103.57 among the options but not exact; the nearest valid choice is Rs 103.57.

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