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: A. Rs. 965.29
- A. Rs. 965.29
- B. Rs. 950.00
- 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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About Financial Mathematics: Interest, Annuities and Discounting
Financial mathematics covers simple and compound interest, principal, rate, time, accumulated value and present value. It also includes annuities, regular payments, sinking funds, loan repayments and discounting, with a distinction between ordinary annuities and annuities due and between trade discount and mathematical discount.
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