This is an independent topic guide, not the official syllabus. Compare it with the current paper outline and rules published by the examination authority.
01 / UNDERSTANDING
Learning objectives
Cover present value, fixed cash flows, price-yield direction and the limits of single-payment valuation examples. Discount the same promised payment at two required returns and compare prices. Your practical tasks are to list the fixed future cash flows and discount with a matching-period yield. These conceptual objectives are a study framework, not an official question allocation. Demonstrate the distinction with a fresh worked case, including the assumptions that make the answer valid.
02 / UNDERSTANDING
The concept in context
For a bond with fixed promised cash flows, the price and required yield move in opposite directions, other things equal. Discounting explains the relationship without implying that every security has identical risk or price sensitivity. Value a future payment by dividing it by the relevant gross discount factor for its remaining period.
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
Your revision map
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.
