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CS Executive · Capital Market and Securities Laws · Basics of Capital Market

Meridian Ltd issues a bond at Rs 7,000 that pays no periodic interest and is redeemed at Rs 10,000 after five years. Which feature best classifies this instrument?

The instrument is a zero coupon bond. It pays no periodic interest and is issued at a discount of Rs 7,000 against a redemption value of Rs 10,000, so the investor's return is the difference. It is redeemable after five years, so it is not perpetual, floating or convertible.

  1. AFloating rate note, because the return varies with benchmark rates
  2. BZero coupon bond, because the return arises from the discount to redemption valueCorrect
  3. CPerpetual bond, because it has no interest payments
  4. DConvertible debenture, because the investor gains at maturity

Explanation

A bond issued at a discount, paying no periodic interest and redeemed at face value, is a zero coupon bond; the Rs 3,000 gain is the return. It is not perpetual since it is redeemed after five years. Nothing suggests a floating rate or conversion into shares.

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