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 $90.80. What is the amount of reinvestment income necessary to earn the yield to maturity?

A. $268.12
B. $328.12
C. $368.12
Correct Answer: A

1. Find YTM = 9% from N = 40, PV =-90.80, PMT =4, FV = 100, I/Y=4.5 then YTM = 4.5x2 = 9.0%
2. Total amount of coupon and reinvestment income = 4 [(1.045)40 -1]/.045 = $428.12
3. Amount of reinvestment income = $428.12 - 40x4 = $268.12

User Contributed Comments 15

User Comment
synner coupon=coupon payment * period
coupon payment=principal*bond rate, not yield to maturity.
danlan Do not get step 2.
mtcfa Step 2: You are basically getting $160 in coupons. In order to realize the yield to maturity of 9%, those coupons must be reinvested at 9%. Therefore, assuming that you do in fact reinvest the coupons at 9%, the future value of all these is 428.12. The question asks for what amount of reinvestment income is necessary: therefore you take the difference of the $428.16 (fv of reinvested cash flows) less $160 (the dollar value of the coupons themselves). Step 2 is more easily equated on a calculater: n=20, i/y=9%, PV=0, pmt=4; then compute fv.
Winner Nice tip mtcfa
aggabad why do you divide by .045 in the step 2?
semra mtcfa, for your step 2 calculation;
n=40 (not 20),
i/y=4,5% (not 9).
octavianus step 2 is the FVIFA (future value interest function of an annuity)
=
PMT [(((1+r)^t)-1)/r]
chamad step 2: 4=PMT 40=N 4.5=I CPT FV 428.12
cmon pls where did we get that 9% - YTM?!!!!
moneyguy Thanks, chamad!! That's it...
Emily1119 where can I get 9%?
2014 First compute irr:

From problem its clear that bond price is less than par so discount rate is more than par.

so, cf -90.8, 4, 39, 104, irr 4.49

use this to compute NFV, cf 4, f39, 104, compute nfv

from nfv minus par value and interest payment = answer
johntan1979 By now, these kind of questions should not even take more than 30 seconds.
tichas @Johntan- i think it depends when u started
janglejuic johntan1979 f you dude don't be an asshole
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