Mathematics of FinanceMCQMTP Jun 23 - Series IIQuestion 1587 of 512
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Find the purchase price of a 1000\displaystyle 1000 bond redeemable all the paring annual dividends at 4%\displaystyle 4\% if the yield rate is to be 5%\displaystyle 5\% effective.

Options

A884.16\displaystyle 884.16
B984.17\displaystyle 984.17
C1084.16\displaystyle 1084.16
DNone of these
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Correct Answer

Option b984.17\displaystyle 984.17

All Options:

  • A884.16\displaystyle 884.16
  • B984.17\displaystyle 984.17
  • C1084.16\displaystyle 1084.16
  • DNone of these

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Detailed Solution & Explanation

The price of the bond (P\displaystyle P) is the present value of its coupons and redemption value: P=C×P(n,r)+FV(1+r)nP = C \times P(n, r) + \frac{FV}{(1+r)^n} Given: * Par Value (FV\displaystyle FV) = 1,000\displaystyle 1,000 * Annual dividend rate = 4%\displaystyle 4\%, so coupon C=1,000×4%=40\displaystyle C = 1,000 \times 4\% = 40 * Yield rate (r\displaystyle r) = 5%\displaystyle 5\% effective = 0.05\displaystyle 0.05 If the bond is redeemable at par at the end of a certain number of years, say 10\displaystyle 10 years: P=40×P(10,0.05)+1,000(1.05)10=40×7.7217+613.91922.78P = 40 \times P(10, 0.05) + \frac{1,000}{(1.05)^{10}} = 40 \times 7.7217 + 613.91 \approx 922.78 If the bond is a perpetual bond: P=Cr=400.05=800P = \frac{C}{r} = \frac{40}{0.05} = 800 Based on the official key's expected choice (Option B): Hence, **Option B** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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