CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

The amount one can potentially earn, if rates remain constant, on the second interest payment of a 5-year, 6% bond when a reinvestment rate of 8% is available is ______.

A. $1.73
B. $1.11
C. $1.26
Correct Answer: B

3((1.04)8 - 1) = $1.11

User Contributed Comments 20

User Comment
jamiejamie how do you calculate this with a calculator?
Gina now, if this is the 2nd payment, why do you take 1+r to the 8th power, vs:
3((1.04)^2-1)=.24
??
cuong the second payment of a 5-year, 6% bond is $3 (0.06/2*100). The question means how much you will potentially earn from reinvestment with this interest ($3) until maturity. After the second payment, there should be 8 periodic payments left. Thus, the correct calculation is:
3(1.04)^8 - 3 = $1.11
synner on a calculator, N=8, I/Y=4,PV=3, PMT=0
CPT FV = 4.1

4.1-3 = 1.1, earn 1.1 extra.
haarlemmer Interest on interest problem

Without reinvesting in anything, you will have 8 times of interest $3

Now you are able to invest at 8% (4% semi-annually)

The interest on interest is then

3*(1.04^8-1)
Thomy22 sry but where can you read in the question that we are speaking about an semi-annually bond ??
jjowen if not given, semi-annual is the default one.
surob where did 3 came from?
thekapila 3 is coupon payment..6%
danrow sometimes you have to guess that is a coupon bond with a fv of 1000 and sometimes of 100... confusing!
steved333 sometimes, but you just have to use a little intuition. a $1000 FV bond isn't going to be dealing in single-digit dollar interest payments unless the interest is REALLY low...
8thlegend So let me see if I am getting this right

$3 is the 6% bond coupon payment because it's semi annual its 6$/2 = $3.

(1 + (0.08/2))^ (10 - 2) - 1 because it starts from the 2nd coupon rate.

so 3*(1.04)^8 = 1.11?
shiva5555 Where did that equation come from?
JohnnyWu The switch between $100 and 1,000 bond values is a little confusing.
safash shiva5555 equation is in the notes explaning how to calculate reinvestment
jonan203 no, the switch isn't confusing.

no one issues $1,000 par bonds that .10 bps (.10%) coupons. $1,000 x .10% = $1.00

cmon guys!!!
pranubal why is that we have to assume as a semiannual when it is not mentioned anywhere, why can't we assume it as an annual
chester21 Why is assumed semi annual and not annual? Are we meant to guess from the answers?
Fabulous1 You are meant to guess by common sense
pigletin ad wording
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