Spong - Total Return on Bonds

CFA Level III
#1

On Spong’s Case,

Single Bond

P0 = 103, P1=102.5, Coupon = 5% (Semianual), annual reinvestment rate = 2%

What is the total return.

Why is it 4.3459% not 4.3932%?

#2

(102.5 + 2.5 (1.01) + 2.5 - 103) / 103 - 1 = 4.3932%

but need to convert to BEY => [sqrt(1.043932) -1]* 2 = 4.3459%

#3

Thanks cpk123.

Can you also comment on When do we need to convert to BEY?

#4

always … if it is not an annual bond - you need to make it BEY.

otherwise there is no way you can compare two bonds. (in terms of return)

#5

Thanks for quick response.

Got it.