NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)
A 3-year bond of face value ₹100 pays a 9% annual coupon. A portfolio manager buys it at ₹100 and holds it until maturity. If the bond is bought at par, what is the yield to maturity?
The yield to maturity is equal to 9%. When a bond is bought at its face value, the discount rate that makes the present value of coupons and redemption equal to the price is the coupon rate itself.
- ALower than 9%
- BEqual to 9%Correct
- CHigher than 9%
- DCannot be determined without reinvestment rate
Explanation
When a bond is purchased at par, the price equals face value, and the discount rate that equates the cash flows to price is the coupon rate. So YTM = 9%. Reinvestment rate is an assumption of the YTM calculation, not an input needed to find it.
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