CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance
A zero-coupon bond issued by an Indian infrastructure company has a face value of ₹1,000 and matures in 4 years. If investors require a yield to maturity of 10% per annum (annual compounding), what is the fair price of the bond today?
The fair price is ₹683.01. A zero-coupon bond has a single cash flow, the ₹1,000 face value received after four years, so its price is that amount discounted at 10% compounded annually: 1,000 divided by 1.4641.
- A₹683.01Correct
- B₹714.29
- C₹751.31
- D₹620.92
Explanation
A zero-coupon bond pays only the face value at maturity, so Price = 1,000 / (1.10)^4 = 1,000 / 1.4641 = ₹683.01. ₹714.29 is wrong because it discounts at 40% simple interest (1.4). ₹751.31 uses 3 periods and ₹620.92 uses 5 periods.
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