NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
A bond with face value Rs 1,000 pays an annual coupon of 8% and has exactly 2 years to maturity. The yield to maturity is 10% per annum. Which is the approximate price of the bond (annual compounding, next coupon due in one year)?
The price is about Rs 965.29. Discount the Rs 80 coupon in year one and the Rs 1,080 final payment in year two at 10%, giving 72.73 plus 892.56. The price is below par because the yield exceeds the coupon rate.
- ARs 965.29Correct
- BRs 1,000.00
- CRs 1,034.71
- DRs 920.00
Explanation
Coupon = Rs 80. PV = 80/1.10 + 1,080/1.21 = 72.73 + 892.56 = 965.29. Because YTM exceeds coupon, the bond trades at a discount. Rs 1,034.71 is what you get by reversing the discount/premium relationship.
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