CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

An 8%, 20-year, $100-face value bond is selling for par. What is the required amount of reinvestment income necessary to earn the yield to maturity (semi-annual compounding)?

A. $160.00
B. $220.10
C. $380.10
Correct Answer: B

YTM=8% (par bond) reinvestment income = {4 [(1.04)40 -1]/.04 -160} = {380.10-160} = $220.10

User Contributed Comments 17

User Comment
zhaojiang N=40, I/Y =4,PV=0, PMT=4, CPT FV=380.10 380.10-(20*8)=$220.10
melissatt where did that 160 come from? Why 20 x 8 ?
haarlemmer 8(annual interest)* 20(# years in total)
wroger must subtract coupon payments
AlexYuen what abt the principal repayment? Should it not be subtracted too?
tagr Yes, if you use N=40, I/Y=4, PV=-100, PMT=0, CPT FV=480.10 480.10-(20*8)-100=$220.10
julescruis good comment tagr
prachirp Fv=480.10
less 100 (par value)
Less 20*8=160 (interest)

Simple steps.
mrushdi Generaly we have to deduct par value or purchase cost from total cash flows?
moneyguy compute FV of zero-coupon bond then subtract coupon payments and Purchase Price
jonan203 guys, it is simply the future value of an annuity less the sum of the annual coupon payments.

FVa - (coupon payment * years) = reinvestment income
jonan203 HP12C:

4 <enter><enter>
1.04 <enter>
40 <y^x>
1 <minus><times>
.04 <divide>
160 <minus>
johntan1979 For those who are still confused about the 20 x 8, that is actually the coupon interest which needs to be subtracted to get reinvested income.

In actuality, it should be annual coupon rate x face value x annual periods

i.e. 0.08 x 100 x 20
janglejuic thanks johntan1979. without face value it did not make any sense to multiply not converted (8 to 0.08) annual coupon percentage and annual period
fzhou If you're confused with when to subtract coupon payments when not to, please compare this question with question 1 in the same quiz section. In question 1, "total dollar return from coupon AND reinvestment income", therefore you don't have to remove the coupon part; but in this question, it only asked for reinvestment income, therefore you have to subtract the coupon payments from FV.
pigletin 330 should be the reinvestment income (reinvested coupons)

220 is the interest on interest (the amount in excess of the coupons)
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