## Fixed Income

pooja923
Good Student
Posts: 25
Joined: Fri Mar 11, 2016 11:38 am

### Fixed Income

Tony Horn, CFA, is evaluating two bonds. The first bond, issued by Kano Corp., pays a 7.5% annual coupon and is priced to yield 7.0%. The second bond, issued by Samuel Corp., pays a 7.0% annual coupon and is priced to yield 8.0%. Both bonds mature in ten years. If Horn can reinvest the annual coupon payments from either bond at 7.5%, and holds both bonds to maturity, his return will be:

1. greater than 7.0% on the Kano bonds and less than 8.0% on the Samuel bonds.
2. less than 7.0% on the Kano bonds and less than 8.0% on the Samuel bonds.
3. greater than 7.0% on the Kano bonds and greater than 8.0% on the Samuel bonds.

Why is the option 1 correct?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

### Re: Fixed Income

Hi Pooja
Explanation - The yield to maturity calculation assumes that all interim cash flows are reinvested at the yield to maturity (YTM). since Horne,s reinvestment rate is 7.5%, he would realize a return higher 7.0% YTM of the Kano bonds, or a return less than 8.0% YTM of the Samuel bond.