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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)

A Rs 100 face value zero-coupon bond matures in 2 years and is priced to give a yield of 10% per annum with annual compounding. What is its approximate price today?

The price is about Rs 82.64. A zero-coupon bond pays only the Rs 100 maturity value, so it is discounted for two years at 10% compounded annually: 100 divided by 1.21. Discounting for one year or using simple interest gives wrong values.

  1. ARs 80.00
  2. BRs 82.64Correct
  3. CRs 90.91
  4. DRs 83.33

Explanation

Price = 100/(1.10)^2 = 100/1.21 = Rs 82.64. Rs 90.91 discounts for only one year. Rs 80 is simple discounting at 10% per year for two years (100 - 20), ignoring compounding, and Rs 83.33 is 100/1.2 using simple interest.

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