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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Term structure of interest rates

A two-year zero-coupon bond redeems at ₹100 and is currently priced at ₹81. What is its annual effective yield to maturity?

The yield is 11.11% a year. Solving 81 = 100/(1+i)^2 gives 1+i = 10/9. The 23.46% figure is the two-year total return and 11.73% ignores compounding, so neither is an annual effective yield.

  1. A11.11%Correct
  2. B11.73%
  3. C9.50%
  4. D23.46%
  5. 10.00%

Explanation

The yield i solves 81 = 100/(1+i)^2. So (1+i)^2 = 100/81 and 1+i = 10/9, giving i = 11.11%. Using simple interest, (19/81)/2 = 11.73%, which ignores compounding. The figure 23.46% is the two-year total return, not an annual rate.

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