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CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

A zero-coupon bond of face value Rs 1,000 matures in 3 years. The market yield is 10% per annum compounded annually. What is its present value, to the nearest rupee?

The present value is about Rs 751. A zero-coupon bond pays only the face value at maturity, so it is discounted for three years at 10% compounded annually: 1,000 divided by 1.331. Simple-interest discounting would wrongly give Rs 769.

  1. ARs 700
  2. BRs 751Correct
  3. CRs 769
  4. DRs 826

Explanation

PV = 1,000/(1.10)^3 = 1,000/1.331 = Rs 751.31, about Rs 751. Rs 769 uses 1,000/1.3, a simple-interest error. Rs 826 discounts for only two years.

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