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

Meera Industries issues a 5-year zero-coupon bond of face value ₹1,000 at a deep discount, with redemption at par. The bond is issued at ₹680.58 so the yield works out to 8% p.a. compounded annually. Another bond of identical face value and maturity is issued at ₹620.92. What is its yield to maturity?

The yield is 10% p.a. The bond redeems at ₹1,000 after five years from a price of ₹620.92, so the growth factor is 1,000/620.92 = 1.6105, which equals 1.10 raised to the power 5. A lower price than the 8% bond implies a higher yield.

  1. A10% p.a.Correct
  2. B9% p.a.
  3. C12% p.a.
  4. D8% p.a.

Explanation

For the second bond, 1,000/620.92 = 1.6105, which equals 1.10^5. Therefore YTM is 10%. Check: 620.92 × 1.1^5 = 620.92 × 1.61051 = 1,000. Choosing 8% would mean using the first bond's yield, which has a higher price of 680.58.

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