- CFA Exams
- CFA Exam: Level I 2021
- 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**

What is the reinvestment income in dollars from holding a 9%, 11-year bond bought at $107.23 to maturity, $100 face value, assuming rates remain constant?

B. $99.00

C. $174.02

A. $55.12

B. $99.00

C. $174.02

Correct Answer: A

N = 22, I/Y = 4% (from calculated YTM), PV = 0, PMT = 4.5, FV =?= 154.12, RI = 154.12 -99 = 55.12

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**User Contributed Comments**
14

User |
Comment |
---|---|

Gina |
why is I/Y not 4.5%? |

Gina |
oops, okay: current yield=annual interest payment/bond price=.08 I/Y=.08/2=4% |

katybo |
first calculate YTM |

jgwl |
why do you use PV = 0? |

kindal |
to calculate only coupon interest and reinvestment interest excluding any gain/loss in capital. |

moneyguy |
You don't need to enter a PV amount when calculating. Just calculate FV of all coupon payments at YTM rate. Then subtract total coupon payments. |

Emily1119 |
For current yield= annual interest payment/ bond price=0.08. How can I know the annual interest payment? |

2014 |
Capital invested was not 100, but 107.23. Then, why reduced only 100 but not 107.23 |

johntan1979 |
55.1106 |

tshepi |
i am totally lost when it comes to this kind of questions |

jasonkwk |
tshepi , actually it is very easy: first you have to find the YTM ,give the 4 available variable second, substitute the YTM into I/Y and set PV=0 to find FV. the FV is the total return, minus the coupon payment and you will get the reinvestment income. |

pranubal |
AnalystNotes is using this formula Coupon[(1 +YTM )N - 1 ] / YTM in decimal to calculate total earnings. |

praj24 |
Starting to get this now :D |

aparmar |
why subtract 99? |