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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

A bond has face value Rs 1,000, annual coupon 10% and exactly 2 years to maturity, and the yield to maturity is 12% per annum. Coupons are paid annually and the next coupon is due in one year. What is the approximate price?

The price is about Rs 966.20. Discount the Rs 100 coupon in year 1 and the Rs 1,100 final cash flow in year 2 at 12%, giving 89.29 plus 876.91. Since yield exceeds coupon rate, the bond trades at a discount.

  1. ARs 966.20Correct
  2. BRs 1,000.00
  3. CRs 1,033.80
  4. DRs 949.50

Explanation

Price = 100/1.12 + 1100/1.12^2 = 89.29 + 876.91 = Rs 966.20. Rs 1,000 ignores the yield gap; Rs 1,033.80 is the price if yield were 8% (wrong direction); Rs 949.50 discounts the principal incorrectly.

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