A bond has a face value of Rs 1,000. It pays Rs 80 at the end of every year for three years and returns the principal at the end of the third year. Which of the following pairs is correctly matched for this bond?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Coupon rate – 8 per cent
The coupon rate is the yearly payment as a share of the face value.
Coupon rate = 80 ÷ 1,000 × 100 = 8 per cent
Option (1) Face value – Rs 80 — Incorrect. The face value is the Rs 1,000 borrowed; Rs 80 is the yearly payment.
Option (2) Coupon rate – 8 per cent — Correct. Rs 80 a year on Rs 1,000 is 8 per cent.
Option (3) Coupon rate – 80 per cent — Incorrect. This takes Rs 80 as a percentage without dividing by the face value.
Option (4) Maturity period – One year — Incorrect. The principal comes back after three years, so maturity is three years.
NCERT (2026-27): “The Speculative Motive … Typically, bonds are papers bearing the promise of a future stream of monetary returns over a certain period of time. These papers are issued by governments or firms for borrowing money from the public and they are tradable in the market. Consider the following two-period bond. A firm wishes to raise a loan of Rs 100 from the public. It issues a bond that assures Rs 10 at the end of the first year and Rs 10 plus the principal of Rs 100 at the end of the second year. Such a bond is said to have a face value of Rs 100, a maturity period of two years and a coupon rate of 10 per cent. …” |