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.

10.4% p.a

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