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% and have face value of $100. What is the relative percentage of total future dollars that reinvestment income is expected to generate with Bond 1 and 2, respectively?
A. 2.70%; 9.42%
B. 3.37%; 15.03%
C. 12.03%; 27.72%
Explanation: Bond 1: RI/(Total future dollars) = 3.61/133.61 = 0.027
Bond 2: RI/(Total future dollars) = 16.63/176.63 = 0.0942

User Contributed Comments 13

User Comment
shasha asking for total future DOLLARS(=$133.61), not total dollar RETURN[=30+3.61+(100-104.3760)=$29.2340]!
synner Can anyone explain how they got 3.61 and 133.61?
mellyg RI=FV-N*COUPON-FACE
RI_1=133.61-5*6-100=3.61
danlan How to get 133.61?
wollogo The FV of coupons reivested which is $33.61, ($3 @ 2.5% for 10 periods). This is added to the FV to get $133.61. The RI is simply the amount of interest earned less the coupon invested i.e $33.61- $30
danlan Get PV=-1043.76 first, then

We can use N=10, YTM=2.5, PV=-1043, PMT=0 to get FV=1336.1
virashe Total future dollars = sum of (a) coupon x n (b)reinvestment income (c) face value of the bond.

Reinvestment income = future value of reinvested coupons - coupon x n
Shelton Bond1: (1)N=10,I=2.5,PV=0,PMT=3=>FV=-33.61
(2)RI% = (33.61-30)/133.61=2.70%
Bond2: (1)N=20,I=2.5,PV=0,PMT=3=>FV=-76.63
(2)RI% = (76.63-60)/176.63=9.42%
trestresfort Thank you shelton
weic08 120 minutes would not be enough if every question in exam looks like this one.
dream007 120 or 180?
Fardeen thank you sheldon
Znanje35 thank you sheldin
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