The worked question on this page is original educational practice. It is not represented as a question from an official previous-year examination paper.
01 / UNDERSTANDING
Review the question
Construct an original price-yield question with hypothetical figures and no suggested purchase or return guarantee. Hold the cash flow unchanged so only the discount-rate mechanism is tested. An original checkpoint is: At a 10% one-period required yield, what is the price of the promised 110 payment? Supported answer: 100 units. Explain the decisive fact, then alter one condition and solve again. This is an original practice method, not a claim that the question appeared in an official past paper.
02 / UNDERSTANDING
The concept in context
Actual bond valuation can involve multiple coupons, accrued interest and conventions; a single-payment example isolates the basic mechanism. A useful study check is to list the fixed future cash flows, then explain the direction before calculating price. Explain why the method fits the stated facts before applying it to a changed situation.
03 / UNDERSTANDING
A worked learning case
A fictional bond promises one payment of 110 in one year. At a required yield of 10%, its simplified price is 110 divided by 1.10, or 100. If the required yield becomes 20%, the same payment is worth about 91.67 today. The promised cash flow is unchanged, but its discounted present value falls.
ORIGINAL EDUCATIONAL PRACTICE
Try it before you check.
At a 10% one-period required yield, what is the price of the promised 110 payment?
Show the answer and reasoning
100 units.
The present value is 110 divided by 1.10, equal to 100. A buyer paying 100 and receiving 110 earns the stated 10% one-period return if the promised payment occurs. Raising the discount rate lowers the present value of the same cash flow, which establishes the inverse price-yield relationship in this simplified case.
Two traps to watch for.
- Assuming a higher required yield raises a fixed-cash-flow bond price.
- Treating promised payments as a guarantee against market-price changes.
YOUR TOPIC-SPECIFIC LEARNING MAP
Learn from the attempt
List the fixed future cash flows.
Discount with a matching-period yield.
Explain the direction before calculating price.
Explain the idea, apply it to a new situation, then check what changed in your reasoning.
BANKERS TUTORIAL · SOURCE NOTES
Keep the source alongside your notes.
Official links provide subject context and authoritative reference material. This guide’s explanation, scenario and question are original Bankers Tutorial learning content.
- m.rbi.org.in https://m.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=711
For RBI preparation, check the current official notice before relying on changing dates, rules or examination requirements.
