At a market yield of 10%, how does the…

At a market yield of 10%, how does the two-year bond trade?

Question 51

EasyOriginal question

A bond with face value ₹1,000 pays a 9% coupon at the end of each year and is redeemed at face value in 2 years. Answers to the nearest paisa.

At a market yield of 10%, how does the two-year bond trade?

At a premium, because it pays a coupon every yearCorrect answerYour answerAt par, because its face value is ₹1,000Correct answerYour answerAt a discount, because only 2 years are leftCorrect answerYour answerAt a discount, because the yield is above the 9% coupon rateCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer D

Correct answer: D

Buyers can earn 10% elsewhere, but the bond pays only 9%.
So they pay less than ₹1,000 for it: a discount.

Worth noting

The time left changes how big the discount is, not whether there is one.

Concept: Coupon rate against market yield
Typical timeTypical: 90 s
Your timeYours: —

The rule this testsValuing a bond

Practise this chapter →

Ten questions from Perpetuity, Sinking Funds & Bonds, at your own pace.

Practise this chapter →

Ten questions from Perpetuity, Sinking Funds & Bonds, at your own pace.

At a market yield of 10%, how does the two-year bond trade?

Question 51

Explanation