- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 10. Interest Rate Risk and Return
- Subject 1. Sources of Return
CFA Practice Question
An 8%, 20-year, $100-face value bond is selling for $90.80. What is the amount of reinvestment income necessary to earn the yield to maturity?
B. $328.12
C. $368.12
A. $268.12
B. $328.12
C. $368.12
Correct Answer: A
2. Total amount of coupon and reinvestment income = 4 [(1.045)40 -1]/.045 = $428.12
3. Amount of reinvestment income = $428.12 - 40x4 = $268.12
1. Find YTM = 9% from N = 40, PV =-90.80, PMT =4, FV = 100, I/Y=4.5 then YTM = 4.5x2 = 9.0%
2. Total amount of coupon and reinvestment income = 4 [(1.045)40 -1]/.045 = $428.12
3. Amount of reinvestment income = $428.12 - 40x4 = $268.12
User Contributed Comments 16
| User | Comment |
|---|---|
| synner | coupon=coupon payment * period coupon payment=principal*bond rate, not yield to maturity. |
| danlan | Do not get step 2. |
| mtcfa | Step 2: You are basically getting $160 in coupons. In order to realize the yield to maturity of 9%, those coupons must be reinvested at 9%. Therefore, assuming that you do in fact reinvest the coupons at 9%, the future value of all these is 428.12. The question asks for what amount of reinvestment income is necessary: therefore you take the difference of the $428.16 (fv of reinvested cash flows) less $160 (the dollar value of the coupons themselves). Step 2 is more easily equated on a calculater: n=20, i/y=9%, PV=0, pmt=4; then compute fv. |
| Winner | Nice tip mtcfa |
| aggabad | why do you divide by .045 in the step 2? |
| semra | mtcfa, for your step 2 calculation; n=40 (not 20), i/y=4,5% (not 9). |
| octavianus | step 2 is the FVIFA (future value interest function of an annuity) = PMT [(((1+r)^t)-1)/r] |
| chamad | step 2: 4=PMT 40=N 4.5=I CPT FV 428.12 |
| cmon | pls where did we get that 9% - YTM?!!!! |
| moneyguy | Thanks, chamad!! That's it... |
| Emily1119 | where can I get 9%? |
| 2014 | First compute irr: From problem its clear that bond price is less than par so discount rate is more than par. so, cf -90.8, 4, 39, 104, irr 4.49 use this to compute NFV, cf 4, f39, 104, compute nfv from nfv minus par value and interest payment = answer |
| johntan1979 | By now, these kind of questions should not even take more than 30 seconds. |
| tichas | @Johntan- i think it depends when u started |
| janglejuic | johntan1979 f you dude don't be an asshole |
| jhollar | Look at the big brain on Johntan |