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CA Final · Advanced Financial Management · Security Valuation

A 9% annual-coupon bond of face value ₹1,000 is quoted at ₹920 and will be redeemed at par after 5 years. Using the approximate yield to maturity formula (annual coupon plus annual amortisation of discount, divided by the average of price and redemption value), what is the approximate YTM?

The approximate YTM is 11.04%. Annual return is the ₹90 coupon plus ₹16 of yearly discount amortisation, totalling ₹106, divided by the average of the ₹920 price and ₹1,000 redemption value, which is ₹960. Current yield of 9.78% ignores the capital gain.

  1. A9.78%
  2. B11.04%Correct
  3. C11.52%
  4. D9.00%

Explanation

Annual coupon = 90. Discount = 1,000 − 920 = 80, amortised over 5 years = 16 a year. Numerator = 106. Average of price and redemption = (920 + 1,000)/2 = 960. YTM ≈ 106/960 = 11.04%. 9.78% is only the current yield (90/920). 11.52% wrongly divides by price alone.

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