CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

You have a 9%, 11-year bond that is selling with a yield to maturity of 10%. What is the total dollar return from coupon and reinvested income? Assume semi-annual compounding.

A. $64.37
B. $163.37
C. $173.27
Correct Answer: C

4.5 [(1.05)22 - 1]/.05 = $173.27 or
N = 22, I/YR = 5, PV = 0, PMT = 4.5, FV=?= $173.27

User Contributed Comments 15

User Comment
nija please can someone compute this and give the answer please? I arrived at 192.5
faya I got 173.27
akanimo take some good advice ... just learn to use the calculator and forget computing these formulas ... its faster ... fewer mistakes ... and it will save you loads of time on the exam.
Spawellian remember to always clear the TVM function before you do anything. On the TI BAII Plus, I always press <2nd> CLR TVM and also <2nd> CLR Work. On the first part of this question, calculating the FV needs the PMT information to be clear. Otherwise the calculator will use the last value you put in there
abbaby can sum1 plzz xplain y PV is tkn as 0
CheeHong Its because they're asking for the coupons and its reinvested returns.
So, 0 PV.
aneild takes longer, but easier to understand...
total return = coupon + capital gains + reinvestment return

PMT=4.5, FV=100, N=22, I/Y=5, PV (discount price) = 93.42

total cash flow return = 93.42*(1.05)^22 = 273.28
substract initial price from total cash flow return... 273.28-93.42 = 179.86
total cash flow return minus capital gains equals dollar return from coupon and reinvestment income
179.86 - (100-93.42) = 173.28
jansen1979 Aneild, why not use the $ 273.28 from your answer and subtract $ 100?
maurlamf because you didn't pay $100... you paid $93.42 as aneild demonstrates above.
fmhp Thanks aneild
johntan1979 To expand on aneild's answer,

Dollar return from coupon and reinvestment income = $173.28

Dollar return from coupon = 9% x $1,000 x 11 = $99
davcer you can use the CF in the BAII CF0= 0 C01=4.5 F01=22 cpt npv= 59.23 then you have 59.23*(1.05exp 22) and get 173.27
birdperson @anelid -- that's well done
Kevdharr The answer is simply the present value of all of the coupon cash flows. N = 22 because you are dealing with 11 years of semi-annual compounding. i = 5% because the annual YTM is 10%. PMT = 4.5 because the annual coupon is 9. PV = 0 because the value of the bond itself is irrelevant here. You just want to know the value of the coupons reinvested at the YTM. The question says, the total dollar value from the COUPONS AND REINVESTED INCOME. Type all of that info in, hit FV and you get 173.27 on the dot.
jzty @Kevdharr, there is a typo in your comment in your first line. It is the "future value" instead of "present value".
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