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    • Question

      A bond with face value ₹1,000 pays annual coupon 9%.

      Market yield for similar risk is 12%. Approximate bond price (one-year discounting for perpetuity ignored — assume bond has long life) — which direction and why?
      A Price > ₹1,000 because coupon > yield Correct Answer Incorrect Answer
      B Price < ₹1,000 because coupon < yield Correct Answer Incorrect Answer
      C Price = ₹1,000 because coupon = yield Correct Answer Incorrect Answer
      D Price = 0 Correct Answer Incorrect Answer

      Solution

      When the coupon rate is less than the market yield (required rate of return), the bond is less attractive and thus sells at a discount to its face value.

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