CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Bond 1 is a 6%, five-year bond, and Bond 3 is a 4%, five-year bond. Both bonds yield 5%. Bond 1 has a higher reinvestment income per total dollar return than Bond 3. What would explain the difference in the rates of reinvestment income for these two bonds?

A. Bond 1 is a premium bond and is more dependent on reinvestment income to offset the capital loss, while Bond 3 has a longer maturity.
B. Bond 3 is a discount bond and is less dependent on reinvestment income because of the capital gain, while Bond 1 has a longer maturity.
C. The longer time to maturity for Bond 3 generates greater compounding with the same yield.
D. Bond 1 is a premium bond and is more dependent on reinvestment income to offset the capital loss, while Bond 3 is a discount bond and is less dependent on reinvestment income because of the capital gain.
Correct Answer: D

User Contributed Comments 9

User Comment
CFALucille A thru C are obviously wrong because they all reference longer maturity when both are 5 yr.. hope exam questions are like this!!
johntan1979 For a moment, I thought there were 3 bonds!
schweitzdm Pulled-to-par
Kevdharr Assume the bond is held to maturity unless told other ways. Bond matures at par. You know bond 1 was purchased at a premium because the coupon > the YTM. So it stands to reason that, because it was bought at an amount greater than par, the repayment of principal will be LESS than what was paid for the bond. Therefore, the reinvestment of income makes up for the difference.
FozzeyBear you idiot johntan1979, it clearly says 2
merc5559 @FozzeyBear hardoooooo
ashish100 lol this exam gets people super stressed. easy to take it out on other candidates

davidt87 johntan's a legend m8
tyjz This problem is stupid. These two bonds have the same time to maturity. So A, B and C are obviously wrong by this point.
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