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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Mr. Arvind Shah buys a 3-year bond with face value Rs 1,000, a 10% annual coupon, for Rs 950. Which is the correct statement about its yields?

Current yield is about 10.5% and yield to maturity is higher than that. Current yield is Rs 100 divided by Rs 950. Since the bond is bought at a discount and redeemed at Rs 1,000, the capital gain lifts the yield to maturity above current yield.

  1. AYield to maturity is below the coupon rate of 10%
  2. BCurrent yield is about 10.5% and yield to maturity is above 10.5%Correct
  3. CCurrent yield is exactly 10% as the coupon rate is 10%
  4. DYield to maturity equals current yield because coupons are annual

Explanation

Current yield = 100/950 = 10.53%. Because the bond is bought at a discount, it also gains Rs 50 at redemption, so YTM exceeds the current yield (about 11.4%). The other statements ignore the discount: YTM is not below the coupon rate and current yield is not equal to it.

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