Kavita buys a bond of face value Rs. 1,000 for Rs. 960, exactly one year before it is redeemed at par. The bond pays interest at 8% per annum, and the interest for that year is paid on the redemption date. Her rate of return on the bond for the year is
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → 12.5%
At the end of the year Kavita receives the interest and the redemption amount:
\( \text{Interest} = 0.08 \times 1000 = 80 \)
\( \text{Redemption amount} = 1000 \)
Her total gain over the Rs. 960 she paid is
\( 80 + 1000 - 960 = 120 \)
The rate of return is this gain as a percentage of the amount invested:
\( \displaystyle \frac{120}{960} \times 100 = 12.5\% \)
Why the other options are incorrect
Option (1) 8.33% — Incorrect. This is the interest alone on the price paid, 80 ÷ 960; it leaves out the gain of Rs. 40 on redemption.
Option (2) 12% — Incorrect. This divides the gain of Rs. 120 by the face value of Rs. 1,000 instead of the Rs. 960 actually invested.
Option (3) 8% — Incorrect. This is the coupon rate of the bond, not the return on the price paid.