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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

A bond with a face value of Rs 100 and a 9% annual coupon has exactly one year left to maturity. Its price is Rs 98.17 right after paying the previous coupon. Assuming the coupon is paid once at maturity along with principal, what is the approximate yield to maturity?

The yield to maturity is about 11.03%. With one year left, the investor receives Rs 109 (principal plus coupon) for a price of Rs 98.17, so the yield is 109 divided by 98.17 minus one. It exceeds the 9% coupon because the bond trades at a discount.

  1. A9.00%
  2. B11.03%Correct
  3. C7.00%
  4. D9.17%

Explanation

Cash flow at maturity = 100 + 9 = Rs 109. YTM = (109/98.17) - 1 = 1.1103 - 1 = about 11.03%. Check: 98.17 x 1.1103 = 109.0. Option A is the coupon rate, option D adds only the price discount gain ignoring base, and option C subtracts rather than adds the discount effect.

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