- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 46. Understanding Fixed-Income Risk and Return
- Subject 1. Sources of Return

###
**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 =122.4-100-4*5 |

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. |