CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

What is the difference in the reinvestment income for the following two bonds? 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.
A. $3.61
B. $13.02
C. $33.61
Explanation: Bond 1 R.I. = 3.61 (PV = 0, N = 10, I/Y = 2.5, PMT = 3, FV =?= 33.61) - 30
Bond 2 R.I. = 16.63 (PV = 0, N = 20, I/Y = 2.5, PMT= 3, FV=?=76.63) - 60
Difference = 16.63 - 3.61 = 13.02

User Contributed Comments 10

User Comment
kalps Where the subtractiosn are the coupon rates of the individual bonds over the period
andrewsutton Yes, can anyone help? What are the 30 and 60? And where are the coupon payments and the capital gain?
stefdunk 30 and 60 are the values of the interest payments (we're only interested in interest on interest, so you've got to subtract the original interest payments)

isn't it interesting how often I can use the word interest in one sentence?
george2006 reinvestment income = coupon contribution to future value at maturity date - undiscounted sum of coupon payments.
Tatyana who said, that bonds are semiannual-paid?
Xocrevilo Tatyana, we just have to assume that they are (because the CFA test-setters say so!). Hopefully that does reflect real-world experience, though I do not have enough experience of the bond market to say so or not.
zed888 why is one 30 and one 60?
ChaseF zed888: 30 and 60 are the total coupon payments made. Bond 1 is a 6%, 5-yr bond so 10 payments of $3 (assuming $100par) = $30 total coupon payments . Bond 2 is 6%, 10-yr bond, so 20 payments of $3 = $60 total coupon payments.
Sibong26 so is it safe to assume that the PV is always $0 when calculating the reinvestment income, im confused???
petervinh18 @Xocrevilo - As I learn in my finance that my instructor told me if question is not indicate "semi" then it will assuming annually. But, since CFA exam say so then I must go for it...
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