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

Mr Raghav Iyer, aged 45, buys a 3-year bond with face value Rs 1,000, annual coupon 10%, paid at year-end. The bond's yield to maturity is 12% p.a. Discount factors at 12%: year 1 = 0.8929, year 2 = 0.7972, year 3 = 0.7118. What is the approximate price of the bond?

The bond price is approximately Rs 952. Discounting the Rs 100 annual coupons and the Rs 1,000 maturity value at 12% gives about Rs 240 plus Rs 712. Because the 10% coupon is below the 12% yield, the bond trades at a discount to face value.

  1. ARs 1,000.00
  2. BRs 951.96Correct
  3. CRs 1,048.04
  4. DRs 900.00

Explanation

PV of coupons: 100 x (0.8929 + 0.7972 + 0.7118) = 100 x 2.4019 = 240.19. PV of face value = 1,000 x 0.7118 = 711.80. Price = 240.19 + 711.80 = 951.99, approximately Rs 951.96 using exact factors (rounding differences). Since coupon is below YTM, the bond trades at a discount, ruling out 1,000 and 1,048.04.

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