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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 face value Rs 1,000 matures in 2 years and is priced to yield 10% per annum, compounded annually. A PMS portfolio manager buys it at the fair price. What is that price, rounded to the nearest rupee?

The fair price is about Rs 826. A zero coupon bond pays only the Rs 1,000 face value at maturity, so it is discounted for two years at 10% compounded annually: 1,000 divided by 1.21 gives roughly Rs 826.

  1. ARs 800
  2. BRs 826Correct
  3. CRs 909
  4. DRs 833

Explanation

Price = 1,000/(1.10)^2 = 1,000/1.21 = Rs 826.45, about Rs 826. Rs 800 uses simple discounting (1,000 - 20%). Rs 909 discounts only one year. Rs 833 divides by 1.2, treating the yield as simple interest.

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