An investor is analyzing a 10-year Government of India Dated Security with a Face Value of 100 rupees and a fixed Coupon Rate of 7.5 percent paid semi-annually. The current market price of this bond in the secondary market is 108 rupees due to a recent decision by the Monetary Policy Committee of the Reserve Bank of India to lower the Repo Rate by 50 basis points. The investor wants to understand the impact of this price increase on the Current Yield and the Yield to Maturity (YTM) of the bond. Based on this data, which of the following statements provides the most accurate financial analysis of the situation?

Question

Accepted Answer

Both the Current Yield and the Yield to Maturity will be lower than the Coupon Rate of 7.5 percent because the investor is paying more than the face value for the same interest stream.

Answer

The price increase has no effect on the Yield because the government will still pay 7.5 rupees per year based on the original face value.

Answer

The Current Yield will increase to 8.1 percent because the market price has gone up while the Coupon Rate remains the same.

Answer

The Current Yield of the bond remains at 7.5 percent but the Yield to Maturity increases because the bond is trading at a premium.

Download Single Question PDF

Share with Friends & Study Groups

Preparing for Economics?

Practice by Subject

Practice by Exam

Topic-Wise Solved Questions