Unit study guide · NISM Series II-A
Characteristics of Debt Securities
10 questions in this unit
What this unit covers
- Which feature normally distinguishes a zero-coupon bond from a bond paying regular coupons?
- What does a credit rating mainly assess for a debt security?
- How does an amortising bond normally repay its principal during its life?
- A bond has ₹2,000 face value and an 8% annual coupon paid half-yearly. What is each coupon payment?
- A bond pays ₹90 annual interest and trades at ₹900. What is its current yield?
- A floating-rate bond pays the benchmark plus 1.5 percentage points. At reset, the benchmark becomes 6.2%. What coupon rate applies?
- A fixed-coupon bond’s credit quality and cash flows are unchanged. Comparable market yields rise. What usually happens to its market price?
- A zero-coupon bond is purchased for ₹8,000 and redeemed for ₹10,000. What is the total rupee gain before tax?
- A bond costs ₹950 and pays ₹80 interest plus ₹1,000 principal exactly one year later. What is its one-year yield to maturity?
- A bond starts with ₹50,000 principal and pays 10% yearly on outstanding principal. ₹10,000 is repaid at each year-end. What is year-two interest?
Key ideas
From the practice bank · 1
Which feature normally distinguishes a zero-coupon bond from a bond paying regular coupons?
A zero-coupon bond has no periodic coupon payments and normally provides its return through the difference between purchase price and redemption value. Remember: Zero coupon means no periodic coupon, not zero risk.
Hint Focus on the timing of interest cash flows, not the absence of risk. Common mistake: Assuming a bond without coupons cannot provide a return.
II-A-021From the practice bank · 2
What does a credit rating mainly assess for a debt security?
A credit rating mainly assesses credit risk, including the issuer’s ability and willingness to meet debt obligations. Remember: A credit rating is an opinion about credit risk, not a repayment guarantee.
Hint Think about the likelihood of meeting promised debt payments. Common mistake: Treating a high rating as insurance against loss.
II-A-022From the practice bank · 3
How does an amortising bond normally repay its principal during its life?
An amortising bond repays principal through scheduled instalments rather than leaving all principal outstanding until maturity. Remember: Amortisation gradually reduces outstanding principal.
Hint Look for a repayment pattern that gradually reduces the outstanding borrowing. Common mistake: Confusing principal instalments with coupon interest.
II-A-023From the practice bank · 4
A bond has ₹2,000 face value and an 8% annual coupon paid half-yearly. What is each coupon payment?
Each half-yearly coupon is ₹80. Annual coupon = ₹2,000 × 8% = ₹160. Each payment = ₹160 ÷ 2 = ₹80. Remember: Coupon frequency changes payment size, not the stated annual coupon amount.
Hint The quoted annual rate must be allocated across the payment periods. Common mistake: Applying the annual rate to every half-year.
II-A-024From the practice bank · 5
A bond pays ₹90 annual interest and trades at ₹900. What is its current yield?
The current yield is 10%. Current yield = ₹90 ÷ ₹900 × 100 = 10%. Remember: Current yield uses market price rather than face value.
Hint Compare the annual cash interest with the amount paid at the current market price. Common mistake: Confusing the coupon rate with current yield.
II-A-025From the practice bank · 6
A floating-rate bond pays the benchmark plus 1.5 percentage points. At reset, the benchmark becomes 6.2%. What coupon rate applies?
The new coupon rate is 7.7%. Calculation: 6.2% + 1.5 percentage points = 7.7%. Remember: A floating coupon changes according to its benchmark and contractual spread.
Hint The stated spread is added in percentage points at the reset. Common mistake: Treating percentage points as a multiplication factor.
II-A-026From the practice bank · 7
A fixed-coupon bond’s credit quality and cash flows are unchanged. Comparable market yields rise. What usually happens to its market price?
The price usually falls because unchanged future cash flows are discounted at a higher required yield. Remember: Bond prices and required yields usually move in opposite directions.
Hint An existing coupon must compete with the return now available on comparable bonds. Common mistake: Assuming a fixed coupon creates a fixed market price.
II-A-027From the practice bank · 8
A zero-coupon bond is purchased for ₹8,000 and redeemed for ₹10,000. What is the total rupee gain before tax?
The total gain is ₹2,000. Calculation: ₹10,000 redemption value − ₹8,000 purchase price = ₹2,000, before tax or costs. Remember: Redemption proceeds include both recovery of investment and any gain.
Hint Compare the amount received on redemption with the amount invested. Common mistake: Calling the entire redemption amount profit.
II-A-028From the practice bank · 9
A bond costs ₹950 and pays ₹80 interest plus ₹1,000 principal exactly one year later. What is its one-year yield to maturity?
The one-year yield to maturity is about 13.68%. Total receipt = ₹80 + ₹1,000 = ₹1,080. Gain = ₹1,080 − ₹950 = ₹130. Yield = ₹130 ÷ ₹950 × 100 = 13.68%. Remember: For a one-year bond, yield to maturity includes every final cash flow.
Hint Include both the coupon and the difference between purchase price and redemption value. Common mistake: Using current yield when the question asks for yield to maturity.
II-A-029From the practice bank · 10
A bond starts with ₹50,000 principal and pays 10% yearly on outstanding principal. ₹10,000 is repaid at each year-end. What is year-two interest?
Year-two interest is ₹4,000. After year one, principal = ₹50,000 − ₹10,000 = ₹40,000. Year-two interest = ₹40,000 × 10% = ₹4,000. Remember: Amortising-bond interest depends on the outstanding principal for the period.
Hint Identify the principal outstanding during the second year, before that year’s repayment. Common mistake: Using the original principal after repayments have begun.
II-A-030