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 2 is a 6%, 10-year bond. Both bonds yield 5%. What would explain the difference in reinvestment income for these two bonds?

A. longer time to maturity for Bond 2 with a higher yield to maturity
B. higher yield to maturity with the same maturity, causing greater compounding
C. longer time to maturity for Bond 2 generates greater compounding with the same yield
D. higher coupon payments for Bond 2, generating more funds reinvested
Correct Answer: C

User Contributed Comments 8

User Comment
joelmats ?
reganbaha !
DonAnd longer maturity & higher coupon = higher reinvestment risk
endurance :-)
gill15 Dont make it complicated and get confused just by the question. Both bonds have EXACTLY the same everything except time to maturity (It's Given).....Only answer that can be correct is C...

And logically....longer you keep something in the bank...the LARGER the affect of compounding interest..
01827 longer time to maturity = more compounding periods = higher YTM.... A is correct as well
johntan1979 Dude, did you read in the question "Both bonds yield 5%"?
ashish100 everybody chill! i got this.

Bond A -> (1.03)^10 = 1.3438
Bond B -> (1.03)^20 = 1.8061

So bond be generates greater compounding with the same yield.
You need to log in first to add your comment.