Hello,
I want to ask about the reality of the re-investment assumption. The 10 Year Treasury is currently at 3.09%, however, you assume you earn that yield if you reinvest the coupons at a 3.09% rate. I just want to ask, in reality, do you find such a rate to reinvest those coupons and where do you usually re-invest them? Or is my reasoning with respect to fixed income incorrect?
Thanks,
The YTM of 3.09 is the IRR - with the inherent assumption of coupons being reinvested at 3.09
Finding those rates later, especially when the rates have peaked now is not probable.
what you could do is, compute the MIRR with reinvestment being at the forward rates.
No matter what reinvestment rates you would take, still the MIRR will be upwards of 3% as the coupons are minimal.
Yes, it is very much possible to reinvest the coupons at 3.09
This can be done by lending in the forward market.
You know the coupon dates, you know the amount - & as it turns out, the forward rate is higher than current spot.
Forward rates will be lower if the curve is inverted. Though, it won’t make much of a difference as the coupon amount is minuscule.