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    Question

    Vidhi wants to invest in a bond. She analyses the yield

    to maturity of various bonds to identify the bond with the highest yield and invests in that. If the face value of all of the following bond is Rs.1000, in which bond would Vidhi invest?
    A A 5 % coupon bond with a price of ₹600 Correct Answer Incorrect Answer
    B A 5 % coupon bond with a price of ₹800. Correct Answer Incorrect Answer
    C A 5 % coupon bond with a price of ₹1,200. Correct Answer Incorrect Answer
    D A 5 % coupon bond with a price of ₹1,500. Correct Answer Incorrect Answer
    E A 5 % coupon bond with a price of ₹1,000. Correct Answer Incorrect Answer

    Solution

    Yield to maturity is the discount rate at which the sum of all future cash flows from the bond are equal to the price of the bond. Where, ·       C = Coupon payment ·       F = Face Value ·       P = Price ·       N = Years to maturity Here, the face value and the coupon payment of the bond are equal hence the bond having the least bond price will yield the highest YTM.

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