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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Anand Ltd issues 10,000 zero-coupon bonds of face value ₹1,000 each, redeemable at par after 3 years, at an issue price of ₹751.30 per bond. A company wanted to check the yield. Which pre-tax cost of debt is closest to the correct yield (IRR)?

The pre-tax cost of the zero-coupon bond is 10%. Discounting the ₹1,000 redemption value over three years at 10% gives 1,000 divided by 1.331, which equals ₹751.30, exactly the issue price, so 10% is the internal rate of return.

  1. A10%Correct
  2. B8%
  3. C13.31% (simple average discount over 3 years)
  4. D12%

Explanation

Check the discounting: 1,000/(1.10)^3 = 1,000/1.331 = 751.30, so the IRR is exactly 10%. At 12%, the price would be 711.78, and at 8% it would be 793.83, so both are wrong. The simple average discount gives 33.1%/3 on a different base and is not the yield.

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