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

Kaveri Ltd issues a 3-year zero coupon bond of face value ₹1,00,000 at a deep discount. The bond is issued at ₹75,131 so that the yield to the investor is 10% p.a. compounded annually. Kaveri's tax rate is 25% and interest is deductible as accrued on a straight-line basis for this question's simplicity. What is the approximate annual tax saving to Kaveri, assuming the total discount is spread equally over the 3 years?

The annual tax saving is about ₹2,072. The total discount is ₹24,869, which spreads to about ₹8,290 a year over three years, and 25% of that is roughly ₹2,072. Option ₹8,290 forgets tax and ₹6,217 is the whole-term saving.

  1. A₹2,072Correct
  2. B₹2,500
  3. C₹6,217
  4. D₹8,290

Explanation

Total discount = 1,00,000 − 75,131 = 24,869. Spread equally over 3 years = 8,289.67 a year. Tax saving = 25% × 8,289.67 ≈ 2,072. Option C 6,217 is the total discount × 25% divided incorrectly, i.e. the total saving 6,217 not divided by 3. Option D ignores the tax rate.

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