A bond of face value Rs. 4,000 pays interest at 9% per annum, payable half-yearly, and is redeemable at par at the end of 5 years. Its current market price is Rs. 3,750, and an investor wants a yield of 10% per annum compounded half-yearly. Match List-I with List-II.
| List-I | List-II | ||
| (A) | Each interest payment | (I) | 9.6% |
| (B) | Number of interest payments | (II) | Rs. 180 |
| (C) | Yield rate per half-year | (III) | 10 |
| (D) | Current yield at the market price | (IV) | 5% |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A)-(II), (B)-(III), (C)-(IV), (D)-(I)
With half-yearly interest, the coupon rate and the yield rate are both halved, and the number of years is doubled.
(A) \( 4000 \times \displaystyle\frac{0.09}{2} = 4000 \times 0.045 = 180 \) → (II)
(B) \( 5 \times 2 = 10 \) → (III)
(C) \( \displaystyle\frac{10\%}{2} = 5\% \) → (IV)
(D) The current yield uses the yearly interest, 2 × 180 = Rs. 360: \( \displaystyle\frac{360}{3750} \times 100 = 9.6\% \) → (I)