CFA Practice Question

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CFA Practice Question

Bond 3 is a 4%, five-year bond that yields 5%. What is the relative percentage of total future dollars that reinvestment income is expected to generate with Bond 3?
A. 1.97%
B. 2.52%
C. 10.75%
Explanation: Bond 3 R.I. = 2.41 (PV = 0, N = 10, I/Y = 2.5, PMT= 2, FV =? = 22.41) - 20
Total future dollars = 95.62(1.025)10 = 122.40
% = 2.41/122.40 = 1.97%

User Contributed Comments 10

User Comment
kalps Total future dollar value = 100 + 20 + 2.61 20 is from the coupon rate
chenyx R.I=2.24
Total future dollars=100+22.41=122.41
danlan 2.4=Future value-Face Value-All Coupon Payments
danlan From N=10, I=2.5, PMT=20, FV=1000==>PV=-956

Use same N, I, PV, set PMT=0, we get FV=1224.067

Reinvestment income=FV-Face value-all coupon payments=1224.067-1000-40*5=24.067

So the result is 24.067/1024.067=1.97%
Shelton find the one closest to r=4%/2=2% (A)
cfahitman how do all you guys know that it is a semi-annual payment bond? or do all bonds pay semiannually?
ElenaStep Just assume that all bonds pay twice/year unless otherwise noted
jpducros Shelton, I would like your shortcut to work...but intuitively, if the coupon is 4%/2 and the yield is 5%/2, shouldn't we expect the answer to the question a bit over 4%/2....and then choose Answer 2 ? I'm obviously wrong...but I'd like to find a shortcut that works.
challenge10 If not explicit do we have to assume they are semi annual payments?
BladeMage3 CFAI questions always specify semiannual coupon payments.
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