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CSEET · Economic and Business Environment · Indian Financial Markets

A bond with a face value of ₹1,000 carries a coupon of 8% per annum and is trading in the market at ₹800. Ignoring maturity effects, what is its current yield, and what does it indicate about the bond's price relative to its coupon?

The current yield is 10%. The annual coupon is ₹80 (8% of ₹1,000 face value), and dividing by the market price of ₹800 gives 10%. The bond trades at a discount to face value, so the yield is higher than the coupon rate.

  1. A8.0%; bond trades at par
  2. B10.0%; bond trades at a discount and current yield exceeds coupon rateCorrect
  3. C6.4%; bond trades at a premium
  4. D10.0%; bond trades at a premium

Explanation

Annual coupon = 8% of ₹1,000 = ₹80. Current yield = 80/800 = 10%. Check: 10% of 800 = 80. Since the price ₹800 is below face value ₹1,000, the bond trades at a discount and yield exceeds the coupon rate. Using 8% of 800 = 64 gives the 6.4% error, which wrongly applies the coupon to market price.

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