- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 46. Understanding Fixed-Income Risk and Return
- Subject 1. Sources of Return

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**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

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**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 |