A bond with a face value of Rs. 1,000 pays an annual coupon of 8% and matures after 2 years. If the required yield is 10%, what is its price?
Correct answer: B. Rs. 965.29
- A. Rs. 950.00
- B. Rs. 965.29
- C. Rs. 980.00
- D. Rs. 1,000.00
Explanation
The bond price is the present value of its Rs. 80 coupon in year 1 and Rs. 1,080 in year 2. Thus, price = 80/1.10 + 1,080/(1.10)^2 = Rs. 965.29. Because the coupon rate is below the required yield, the bond sells below face value.
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