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Basic Question 10 of 13
Bond 1 is a 6%, five-year bond, and Bond 2 is a 6%, 10-year bond. Both bonds yield 5%. What would explain the difference in reinvestment income for these two bonds?
B. higher yield to maturity with the same maturity, causing greater compounding
C. longer time to maturity for Bond 2 generates greater compounding with the same yield
D. higher coupon payments for Bond 2, generating more funds reinvested
A. longer time to maturity for Bond 2 with a higher yield to maturity
B. higher yield to maturity with the same maturity, causing greater compounding
C. longer time to maturity for Bond 2 generates greater compounding with the same yield
D. higher coupon payments for Bond 2, generating more funds reinvested
User Contributed Comments 8
| User | Comment |
|---|---|
| joelmats | ? |
| reganbaha | ! |
| DonAnd | longer maturity & higher coupon = higher reinvestment risk |
| endurance | :-) |
| gill15 | Dont make it complicated and get confused just by the question. Both bonds have EXACTLY the same everything except time to maturity (It's Given).....Only answer that can be correct is C... And logically....longer you keep something in the bank...the LARGER the affect of compounding interest.. |
| 01827 | longer time to maturity = more compounding periods = higher YTM.... A is correct as well |
| johntan1979 | Dude, did you read in the question "Both bonds yield 5%"? |
| ashish100 | everybody chill! i got this. Bond A -> (1.03)^10 = 1.3438 Bond B -> (1.03)^20 = 1.8061 So bond be generates greater compounding with the same yield. |
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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.