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

A zero coupon bond of face value Rs 1,000 maturing in 2 years is bought at Rs 850 now. Which statement about this bond is correct?

A zero coupon bond is bought at a discount and pays no periodic coupon; the investor's return is the gap between the redemption value and the purchase price, here Rs 150. Its price falls, not rises, when market interest rates increase.

  1. AIt pays a semi-annual coupon of Rs 75
  2. BIt pays periodic interest and redeems at a premium
  3. CIt is issued at a discount and the investor's return is the difference between redemption value and purchase priceCorrect
  4. DIts price will always rise when market interest rates rise

Explanation

A zero coupon bond pays no periodic interest; it is issued or bought at a discount to face value and the return is the gain at redemption (Rs 1,000 - Rs 850 = Rs 150). Rising interest rates reduce, not raise, its price.

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