- 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
What is the reinvestment income in dollars from holding a 9%, 11-year bond bought at $107.23 to maturity, $100 face value, assuming rates remain constant?
B. $99.00
C. $174.02
A. $55.12
B. $99.00
C. $174.02
Correct Answer: A
N = 22, I/Y = 4% (from calculated YTM), PV = 0, PMT = 4.5, FV =?= 154.12, RI = 154.12 -99 = 55.12
User Contributed Comments 15
| User | Comment |
|---|---|
| Gina | why is I/Y not 4.5%? |
| Gina | oops, okay: current yield=annual interest payment/bond price=.08 I/Y=.08/2=4% |
| katybo | first calculate YTM |
| jgwl | why do you use PV = 0? |
| kindal | to calculate only coupon interest and reinvestment interest excluding any gain/loss in capital. |
| moneyguy | You don't need to enter a PV amount when calculating. Just calculate FV of all coupon payments at YTM rate. Then subtract total coupon payments. |
| Emily1119 | For current yield= annual interest payment/ bond price=0.08. How can I know the annual interest payment? |
| 2014 | Capital invested was not 100, but 107.23. Then, why reduced only 100 but not 107.23 |
| johntan1979 | 55.1106 |
| tshepi | i am totally lost when it comes to this kind of questions |
| jasonkwk | tshepi , actually it is very easy: first you have to find the YTM ,give the 4 available variable second, substitute the YTM into I/Y and set PV=0 to find FV. the FV is the total return, minus the coupon payment and you will get the reinvestment income. |
| pranubal | AnalystNotes is using this formula Coupon[(1 +YTM )N - 1 ] / YTM in decimal to calculate total earnings. |
| praj24 | Starting to get this now :D |
| aparmar | why subtract 99? |
| yunkai03 | yes |