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Questions › GATE › GATE 2023 › Q42
1 markMacroeconomics › Time value of money and bond pricing › Bond prices, yields and no-arbitrageEasyabout 1 min

GATE 2023 Question 42: Time value of money and bond pricing

Suppose Amar borrows Rs. 1000 from Ujala. After one year, Ujala wants Rs. 1100 back from Amar. The yield to maturity in percent (%) on this borrowing is ______ (round off to one decimal place).

Answer and worked solution

Answer: 10.0

For a simple one-period loan, the yield to maturity equals the percentage return the lender earns:

YTM=Repayment−PrincipalPrincipal×100=1100−10001000×100=1001000×100=10%YTM = \frac{\text{Repayment} - \text{Principal}}{\text{Principal}} \times 100 = \frac{1100-1000}{1000} \times 100 = \frac{100}{1000}\times 100 = 10\%YTM=PrincipalRepayment−Principal​×100=10001100−1000​×100=1000100​×100=10%

Therefore the yield to maturity is 10.0%.

The trap: 110.0

A rushed reading might compute 1100/1000=1.11100/1000=1.11100/1000=1.1 and misreport it directly as '110%' by forgetting to subtract the principal first — reporting the total repayment ratio instead of the net percentage gain.

Time value of money and bond pricing has come up 20 times in 5 exams since 2010.

What this question tests

This question is on Bond prices, yields and no-arbitrage, part of Time value of money and bond pricing in Macroeconomics.

How bond prices move with interest rates and what ties asset returns together.

TestStop has 8 past-paper questions on this subtopic.

Take this paper as a timed mockMore on Bond prices, yields and no-arbitrage

Question from the GATE 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.