Bond Characteristics

A bond is a debt instrument issued by a borrower (government, PSU, corporate, etc.) to raise capital from investors. The issuer promises to pay a fixed coupon at regular intervals and to return the face value (also called par value) on the maturity date.

In the Indian context, SEBI requires the issuer to disclose the coupon frequency (annual, semi‑annual, or quarterly), the date of first coupon, and any call/put options. These disclosures affect the cash‑flow timing that distributors must model when constructing a portfolio.

Exam relevance: Questions often present a bond’s face value, coupon rate and years to maturity, then ask for price, yield or cash‑flow schedule. Remember that the coupon amount is calculated on the face value, not on the market price.

• Face Value – amount repaid at maturity, usually ₹100 or ₹1,000 per unit.
• Coupon Rate – annual interest expressed as a percent of face value.
• Maturity – the date when the principal is repaid.

The coupon rate is fixed at issuance and determines the periodic interest payment. For a bond with ₹1,000 face value and an 8% coupon, the annual coupon amount is ₹80. If coupons are paid semi‑annually, each payment is ₹40.

Maturity defines the horizon of the cash‑flow stream. Short‑term bonds (≤3 years) have lower interest‑rate risk, while long‑term bonds (≥10 years) are more sensitive to rate changes, a point frequently tested in risk‑assessment questions.

Why it matters for the exam: The relationship between coupon rate and prevailing market rates determines whether a bond trades at a premium, discount or at par. If the coupon is higher than the market yield, the bond will be priced above face value (premium); the opposite yields a discount.

The price of a bond is the present value of all future cash flows – the periodic coupons and the face value at maturity. Discounting uses the market yield (y) as the discount rate, not the coupon rate.

Mathematically, the price (P) is calculated as:

P = \frac{C}{y}\left(1 - \frac{1}{(1+y)^{n}}\right) + \frac{FV}{(1+y)^{n}}

Where C is the annual coupon amount, y is the market yield (in decimal), n is the number of years to maturity, and FV is the face value. This formula is a staple of NISM calculations and appears in multiple-choice and numerical questions.

Current yield provides a quick snapshot of the income generated by a bond relative to its market price. It is calculated by dividing the annual coupon by the current market price.

The formula is simple, but the exam tests whether you apply it to the correct price (market price, not face value) and express the result as a percentage.

Current yield does not consider capital gains or losses that arise when the bond is held to maturity, so it differs from Yield to Maturity (YTM). Knowing when the exam expects current yield versus YTM is crucial for scoring.

Yield to Maturity (YTM) is the internal rate of return (IRR) that equates the present value of all future cash flows to the bond’s current market price. It incorporates both coupon income and any capital gain or loss realized at maturity.

While the exact YTM calculation requires iterative methods or a financial calculator, the NISM exam often asks you to identify the relationship: when a bond trades at a premium, YTM < coupon rate; when at a discount, YTM > coupon rate.

Understanding this relationship helps you answer scenario‑based questions where the exam gives you price and coupon and asks whether the bond is priced above or below par, without requiring a numeric YTM solve.

Duration measures the weighted average time to receive a bond’s cash flows and is a proxy for interest‑rate sensitivity. Longer‑duration bonds experience larger price swings when market yields change.

In the Indian PMS context, SEBI expects distributors to match a client’s investment horizon with the bond’s duration. A mismatch can be flagged as unsuitable advice during compliance checks.

Exam tip: If the question gives a high coupon and short maturity, the duration will be low, indicating lower interest‑rate risk. Conversely, low‑coupon, long‑maturity bonds have high duration and higher risk, which the exam may test through scenario analysis.