A bond of face value Rs 1000 matures in 5 years interest is paid semi-annually and bond is priced to yield 8% p.a. If the present value of bond is Rs 1100, find the annual coupon rate.
Answer & explanation
Correct answer: option 1
The correct answer is option (1) : 10.4% p.a
$F= ₹1000,$
$N= 10$ half years
$d=\frac{8}{2}$ %=4% per half year
$i=0.04, P.V=₹1100, r=?$
Approx YTM $=\frac{C+\frac{F-P.V}{N}}{\frac{F+P.V}{2}}$
$0.04=\frac{C+\frac{1000/1100}{10}}{\frac{1000+1100}{2}}$
$C-10=0.04×1050$
$C-10=42$
$C=52$
$⇒F×\frac{r}{100}=52$
$∴r=\frac{52×100}{1000}=5.2$% per half year
or $r=10.4$% p.a