Fixed Income

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

Fixed Income

Postby pooja923 » Mon May 16, 2016 5:40 pm

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

Postby edupristine » Tue May 17, 2016 7:16 am

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.


Return to “CFA Level I”



cron

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.