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Basic Question 11 of 13
Bond 1 is a 6%, five-year bond, and Bond 3 is a 4%, five-year bond. Both bonds yield 5%. Bond 1 has a higher reinvestment income per total dollar return than Bond 3. What would explain the difference in the rates of reinvestment income for these two bonds?
B. Bond 3 is a discount bond and is less dependent on reinvestment income because of the capital gain, while Bond 1 has a longer maturity.
C. The longer time to maturity for Bond 3 generates greater compounding with the same yield.
D. Bond 1 is a premium bond and is more dependent on reinvestment income to offset the capital loss, while Bond 3 is a discount bond and is less dependent on reinvestment income because of the capital gain.
A. Bond 1 is a premium bond and is more dependent on reinvestment income to offset the capital loss, while Bond 3 has a longer maturity.
B. Bond 3 is a discount bond and is less dependent on reinvestment income because of the capital gain, while Bond 1 has a longer maturity.
C. The longer time to maturity for Bond 3 generates greater compounding with the same yield.
D. Bond 1 is a premium bond and is more dependent on reinvestment income to offset the capital loss, while Bond 3 is a discount bond and is less dependent on reinvestment income because of the capital gain.
User Contributed Comments 9
| User | Comment |
|---|---|
| CFALucille | A thru C are obviously wrong because they all reference longer maturity when both are 5 yr.. hope exam questions are like this!! |
| johntan1979 | For a moment, I thought there were 3 bonds! |
| schweitzdm | Pulled-to-par |
| Kevdharr | Assume the bond is held to maturity unless told other ways. Bond matures at par. You know bond 1 was purchased at a premium because the coupon > the YTM. So it stands to reason that, because it was bought at an amount greater than par, the repayment of principal will be LESS than what was paid for the bond. Therefore, the reinvestment of income makes up for the difference. |
| FozzeyBear | you idiot johntan1979, it clearly says 2 |
| merc5559 | @FozzeyBear hardoooooo |
| ashish100 | lol this exam gets people super stressed. easy to take it out on other candidates |
| davidt87 | johntan's a legend m8 |
| tyjz | These two bonds have the same time to maturity. So A, B and C are obviously wrong by this point. |
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Edward Liu
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.