CA Final · Advanced Financial Management · Security Valuation
Kaveri Textiles bonds have a face value of ₹1,000, a 9% annual coupon and 5 years to maturity, redeemable at par. The bond currently trades at ₹900. Using the standard approximation formula, YTM = [C + (F − P)/n] ÷ [(F + P)/2], what is the approximate YTM?
The approximate YTM is 11.58%. Annual return is the ₹90 coupon plus ₹20 yearly share of the ₹100 discount, totalling ₹110, divided by the average of face value and price, ₹950. The current yield of 10% ignores the capital gain on redemption.
- A10.00%
- B11.58%Correct
- C12.22%
- D9.00%
Explanation
Annual coupon = ₹90. Annual discount amortisation = (1,000 − 900)/5 = ₹20. Numerator = ₹110. Average price = (1,000 + 900)/2 = ₹950. YTM = 110/950 = 11.58%. The 10.00% figure is only the current yield (90/900), and 12.22% wrongly divides by the market price ₹900 instead of the average of face and price.
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