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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 with a face value of ₹10,000 is issued at ₹8,000 and matures in exactly 2 years. Which is the closest annual compounded yield to maturity?

The yield to maturity is about 11.8% per year. The bond grows from ₹8,000 to ₹10,000, a factor of 1.25 over two years, so the annual compounded rate is the square root of 1.25 minus one, roughly 11.8%.

  1. A10.0%
  2. B11.8%Correct
  3. C12.5%
  4. D25.0%

Explanation

Yield: (10,000/8,000)^(1/2) - 1 = (1.25)^0.5 - 1 = 1.1180 - 1 = 11.8%. Check: 8,000 x 1.118^2 = 8,000 x 1.25 = 10,000. The 12.5% option is simple annual return (25%/2) ignoring compounding, and 25% is the total return.

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