A bond of face value Rs. 1,000 has a coupon rate of 8% per annum, paid yearly. Its current market price is Rs. 900. Which of the following statements are correct?
(A) The bond is selling at a discount of Rs. 100.
(B) The annual coupon payment is Rs. 72.
(C) The current yield of the bond is 8.89%.
(D) The coupon rate of the bond is 8.89%.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) and (C) only
The coupon is the coupon rate applied to the face value:
\( C = 0.08 \times 1000 = 80 \)
The current yield is the coupon as a percentage of the market price:
\( \displaystyle \frac{80}{900} \times 100 = 8.89\% \)
The market price is below the face value by
\( 1000 - 900 = 100 \)
So the bond sells at a discount of Rs. 100, the coupon is Rs. 80, the coupon rate is 8% and the current yield is 8.89%.
Checking the statements
(A) The bond is selling at a discount of Rs. 100. — Correct. 1,000 − 900 = 100.
(B) The annual coupon payment is Rs. 72. — Incorrect. The coupon is 8% of the face value, Rs. 80; Rs. 72 is 8% of the market price.
(C) The current yield of the bond is 8.89%. — Correct. 80 ÷ 900 = 0.0889.
(D) The coupon rate of the bond is 8.89%. — Incorrect. The coupon rate is 80 ÷ 1,000 = 8%; 8.89% is the current yield.