Unit study guide · NISM Series XV
Terminology in Equity and Debt Markets
3 questions in this unit
What this unit covers
- A bond with face value ₹1,000 pays an annual coupon of ₹90 and currently trades at ₹900. Its current yield is:
- Which feature is most characteristic of a zero-coupon bond?
- Two otherwise comparable bonds have the same yield, but Bond A has a materially higher duration than Bond B. For a small parallel rise in yields, which statement is generally correct?
Key ideas
From the practice bank · 1
A bond with face value ₹1,000 pays an annual coupon of ₹90 and currently trades at ₹900. Its current yield is:
Current yield = Annual coupon ÷ Current market price = ₹90 ÷ ₹900 = 10%. Current yield is not the same as yield to maturity because it ignores the or loss to redemption and timing of all cash flows. Remember: Coupon rate uses face value. Current yield uses current market price.
Hint Common mistake: Using the coupon rate as the current yield when the bond trades away from par.
XV-068From the practice bank · 2
Which feature is most characteristic of a zero-coupon bond?
A zero-coupon bond does not make periodic coupon payments. The investor’s return generally arises from the difference between the purchase price and the redemption amount at maturity. Remember: Zero coupon describes the absence of periodic interest payments, not the absence of return.
Hint Common mistake: Assuming “zero coupon” means “zero return.”.
XV-069From the practice bank · 3
Two otherwise comparable bonds have the same yield, but Bond A has a materially higher duration than Bond B. For a small parallel rise in yields, which statement is generally correct?
Duration is a measure of a bond’s sensitivity to changes in yield, subject to the usual approximation limits. A higher duration generally implies a larger percentage price change for a given small change in yield, all else equal. Remember: Higher duration generally means greater price sensitivity to interest-rate movements.
Hint Common mistake: Confusing duration with maturity alone or with credit risk.
XV-070A capital gain is the gain from selling an asset for more than its eligible cost.
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