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

Mr. Iyer buys a bond with face value Rs 1,000 and a 10% annual coupon, with exactly 2 years to maturity. The next coupon is due in one year. If the required yield is 10%, what is the price of the bond? And, if the required yield is 12%, what is the closest price?

The price is Rs 1,000 when the yield equals the 10% coupon, and about Rs 966 when the yield is 12%. Discounting the coupon of Rs 100 and the final Rs 1,100 at 12% gives 89.29 plus 876.91, which is roughly Rs 966.

  1. ARs 1,000 at 10%; about Rs 966 at 12%Correct
  2. BRs 1,000 at 10%; about Rs 1,034 at 12%
  3. CRs 1,100 at 10%; about Rs 966 at 12%
  4. DRs 966 at 10%; about Rs 1,000 at 12%

Explanation

At 10% yield equal to the coupon, price is par, Rs 1,000. At 12%: 100/1.12 + 1100/1.2544 = 89.29 + 876.91 = 966.20. Option B wrongly gives a premium when the yield exceeds the coupon.

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