IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies
Sundaram Ltd has in issue a 10-year bond with face value ₹1,000, paying an annual coupon of 8%. Market yields for similar risk are now 10% per annum, and the bond has exactly 2 years to maturity, with a coupon just paid. What is the closest market price per bond?
The bond is worth the present value of its remaining cash flows at 10%: 80 discounted one year plus 1,080 discounted two years, which gives about ₹965.29. It trades at a discount because the coupon is below the market yield.
- A₹965.29Correct
- B₹1,000.00
- C₹1,034.71
- D₹1,080.00
- ₹930.58
Explanation
Price = 80/1.10 + 1,080/1.21 = 72.727 + 892.562 = 965.29. Option ₹1,034.71 wrongly treats a yield above coupon as giving a premium. ₹1,000 ignores the yield difference.
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