NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
A zero-coupon bond with face value Rs 1,00,000 matures in 3 years and is priced to give a yield of 10% per annum compounded annually. Which is the nearest price today?
The price is about Rs 75,131. A zero-coupon bond is valued by discounting its single maturity payment of Rs 1,00,000 for three years at 10%, i.e. dividing by 1.331. Discounting for only one year would wrongly give Rs 90,909.
- ARs 70,000
- BRs 75,131Correct
- CRs 77,000
- DRs 90,909
Explanation
Price = 1,00,000 / (1.10)^3 = 1,00,000 / 1.331 = about Rs 75,131. Check: 75,131 x 1.331 is about 1,00,000. Rs 70,000 uses simple subtraction of 30%; Rs 90,909 discounts only one year.
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