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    Question

    An investor buys a bond with a face value of ₹1,000,

    coupon of 8%, and market price ₹950. The bond matures in 5 years. What is the Yield to Maturity (YTM) trend and its implication?
    A YTM < Coupon Rate → premium bond Correct Answer Incorrect Answer
    B YTM = Coupon Rate → par bond Correct Answer Incorrect Answer
    C YTM > Coupon Rate → discount bond Correct Answer Incorrect Answer
    D YTM is zero since bond hasn't matured Correct Answer Incorrect Answer
    E YTM is not applicable to fixed income Correct Answer Incorrect Answer

    Solution

    The bond is trading at a discount (₹950 < ₹1,000), so the effective yield (YTM) will be higher than 8%. Investors will earn more due to capital gain at maturity.

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