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Basic Question 6 of 13
The amount one can potentially earn, if rates remain constant, on the second interest payment of a 5-year, 6% bond when a reinvestment rate of 8% is available is ______.
B. $1.11
C. $1.26
A. $1.73
B. $1.11
C. $1.26
User Contributed Comments 20
| User | Comment |
|---|---|
| jamiejamie | how do you calculate this with a calculator? |
| Gina | now, if this is the 2nd payment, why do you take 1+r to the 8th power, vs: 3((1.04)^2-1)=.24 ?? |
| cuong | the second payment of a 5-year, 6% bond is $3 (0.06/2*100). The question means how much you will potentially earn from reinvestment with this interest ($3) until maturity. After the second payment, there should be 8 periodic payments left. Thus, the correct calculation is: 3(1.04)^8 - 3 = $1.11 |
| synner | on a calculator, N=8, I/Y=4,PV=3, PMT=0 CPT FV = 4.1 4.1-3 = 1.1, earn 1.1 extra. |
| haarlemmer | Interest on interest problem Without reinvesting in anything, you will have 8 times of interest $3 Now you are able to invest at 8% (4% semi-annually) The interest on interest is then 3*(1.04^8-1) |
| Thomy22 | sry but where can you read in the question that we are speaking about an semi-annually bond ?? |
| jjowen | if not given, semi-annual is the default one. |
| surob | where did 3 came from? |
| thekapila | 3 is coupon payment..6% |
| danrow | sometimes you have to guess that is a coupon bond with a fv of 1000 and sometimes of 100... confusing! |
| steved333 | sometimes, but you just have to use a little intuition. a $1000 FV bond isn't going to be dealing in single-digit dollar interest payments unless the interest is REALLY low... |
| 8thlegend | So let me see if I am getting this right $3 is the 6% bond coupon payment because it's semi annual its 6$/2 = $3. (1 + (0.08/2))^ (10 - 2) - 1 because it starts from the 2nd coupon rate. so 3*(1.04)^8 = 1.11? |
| shiva5555 | Where did that equation come from? |
| JohnnyWu | The switch between $100 and 1,000 bond values is a little confusing. |
| safash | shiva5555 equation is in the notes explaning how to calculate reinvestment |
| jonan203 | no, the switch isn't confusing. no one issues $1,000 par bonds that .10 bps (.10%) coupons. $1,000 x .10% = $1.00 cmon guys!!! |
| pranubal | why is that we have to assume as a semiannual when it is not mentioned anywhere, why can't we assume it as an annual |
| chester21 | Why is assumed semi annual and not annual? Are we meant to guess from the answers? |
| Fabulous1 | You are meant to guess by common sense |
| pigletin | ad wording |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
calculate and interpret the sources of return from investing in a fixed-rate bond;
CFA® 2024 Level I Curriculum, Volume 4, Module 10.