CFA Practice Question

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CFA Practice Question

If you can invest for two years at 5% today, or invest for 1.5 years at 4.6%, what would you have to earn on your reinvestment to be just as well off?
A. 3.102%
B. 5.40%
C. 6.204%
Explanation: (1+.05/2)4 / (1+.046/2)3 -1 = .03102
Annual = 3.102 x 2 = 6.204

User Contributed Comments 9

User Comment
ehc0791 "semi-annual" compounding should be assumed if not specified.
uberstyle don't forget to double your answer to get to annualized rate. I made a stupid mistake here...
micheleus could anyone explain more?
Criticull logical you could say that the reinvestment rate has to be larger than 5.4, since you would only being achieving that for a quarter of the total time period, which on a weighted average basis could not make up for the foregone .4% over the first 3 6-months periods. Better to know how to do it though.
zzhumanov firstly:I bond, N=2; Pv=100, I=5% => FV=110.25
II bond, N=1.5; Pv=100,i=4.6% => FV=106.98

then: Pv=106.98; Fv=110.25, N=0.5 => i=6.206
kellyyang ZZhumanov your provide answer has a little sightly wrong:
N=2, FV=100, I=5% ->PV=90.70
N=1.5, FV=100, I=4.6%->PV=93.47

-pv=90.70, FV=93.47 N=.5 ->i=6.20
yekky What formula is this or what concept is it using? I solved it correctly knowing that your reinvestment rate should be HIGHER than your given yields if you want to make money.

Could someone shed some light on this question?
jayj001 5*(1.05^2) = 5.5125
5*(1.046^1.5) = 5.3489
5.3489* (1+x)^0.5 = 5.5125
x = 6.21%
dash1s yekky, the formula is:

(1+S4)^4=(1+S3)^3*(1+1F3)
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