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NISM Certifications · NISM-Series-VI: Depository Operations · Special Services - Debt Instruments and Government Securities

A bond with face value Rs 1,000 and a 9% annual coupon is bought in demat form at Rs 1,000 and held to maturity. If a Rs 10,00,000 face value holding is held for one full year, what coupon income is received, and what does a bond price rise above par imply for the current yield on a fresh purchase?

Coupon income is Rs 90,000, being 9% of the Rs 10,00,000 face value. Because current yield equals coupon divided by market price, a price above par lowers the current yield below 9%.

  1. ARs 90,000; current yield falls below 9%Correct
  2. BRs 90,000; current yield rises above 9%
  3. CRs 9,000; current yield falls below 9%
  4. DRs 1,00,000; current yield stays at 9%

Explanation

Coupon = 9% of face value Rs 10,00,000 = Rs 90,000. Current yield = coupon divided by market price, so if the price rises above par, the same Rs 90,000 is divided by a larger number and the yield falls below 9%. Rs 9,000 results from a decimal error.

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