- 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**

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

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**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... |