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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 Rs 1,000 is bought for Rs 800 and redeemed at maturity. How is it issued or traded relative to its face value?

The bond is bought at a discount to face value, and the return comes from the price gain at redemption. A zero coupon bond pays no periodic interest, so the Rs 200 difference between Rs 800 and Rs 1,000 is the investor's entire return.

  1. AAt a premium to face value, since it pays no coupon
  2. BAt par, since it pays no coupon
  3. CAt a discount to face value, with the return coming from the price gain at maturityCorrect
  4. DAt a discount, with periodic interest paid at half-yearly intervals

Explanation

A zero coupon bond pays no periodic interest. It is bought at a discount (Rs 800 versus Rs 1,000 face value) and the investor's return is the difference realised on redemption.

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