 # 3 years ago, Tom puchased 1000 face 4.5 semiannual

3 years ago, Tom puchased 1000 face 4.5 semiannual coupon bond with 7 years to maturity priced to yield 6.5% for \$888.94. The reinvestment income that must be generated over the life of the bondfor the investor to realize a yeild of 6.5% is closest to: Please show me how to do it in calculator? Thanks.

I would find the FV of this bond n= 14 I= 6.5/2 PV=-888.94 pmt= 22.5 cpt FV= \$1391.02 1391.02-888.94-315= 187.08

i’d simply find the FV of the annuity pmt = 22.5 n=14 r = 6.5/2 404.58 and then subtract, 45x7 = 315 out of it. i’d get the answer 89.5 as reinvestment income.

The coupon is interest too, I would not deduct it.

the question is askign for reinvestment income.

Portfolio can we get an answer?

888.94 * (1.0325)^14 = what the bond’s value should be over the remaining term to get the 6.5% = 1391.02 1000 + 22.5 * 14 = What is the future value. = 1315 Reinvestment income = Difference between the two. = 1391.02 - 1315 = 76.02 This is your answer --> if I remember right. CP

CPK… that wht I thought the amount is. Find the value of 888.94 @ 6.5 compounted semi annually for 7 years Find the total coupons paid in 7 years + par value find the difference.

hmm… I can see why cpk’s solution would work . but I can’t see why my method wouldn’t work. plus getter, you are incorporating the captial gain in your reinvestment income so you gotta subtrac tthat from your answer. btw what is TRUE ANsWER FOR THIS ONE?

crap your right CPK, I should have deducted 1000 in my calc not 888.94 and I would get the same # as you

I kinda, sorta remember the answer was 76 from one of Schweser’s practice exams as well… CP

cpk123 Wrote: ------------------------------------------------------- > I kinda, sorta remember the answer was 76 from one > of Schweser’s practice exams as well… > > CP can you please find the flaw with my method? if i am wrong i need to know whats wrong.

pepp you paid 888.94 today for the bond. because it is 6.5% market rate, 4.5% coupon. Discount bond. So if you needed the 6.5% return --> you need to see how much you should have gotten in the future to receive the 6.5% return. you are getting 1000 + 22.5 * 14 (with the current coupon rate). difference is what you should reinvest to receive your return,

pepp Wrote: ------------------------------------------------------- > cpk123 Wrote: > -------------------------------------------------- > ----- > > I kinda, sorta remember the answer was 76 from > one > > of Schweser’s practice exams as well… > > > > CP > > > can you please find the flaw with my method? if i > am wrong i need to know whats wrong. Actually my method works and is simple. I just did the math wrong. applied the interest as 3.75 as opposed to 3.25. I get 391.02 subtract 315 from it. get 76.02

cpk123 is correct. This is the answer cpk123 Wrote: ------------------------------------------------------- > 888.94 * (1.0325)^14 = what the bond’s value > should be over the remaining term to get the 6.5% > = 1391.02 > > 1000 + 22.5 * 14 = What is the future value. = > 1315 > > Reinvestment income = Difference between the two. > = 1391.02 - 1315 = 76.02 > > This is your answer --> if I remember right. > > CP

in your method , pepp, aren’t you ignoring what the bond was bought for? I think you are better off doing the way I have done use the 888.94 as well as the 1000. That way you are going to make lesser mistakes. CP

cpk123 Wrote: ------------------------------------------------------- > in your method , pepp, aren’t you ignoring what > the bond was bought for? > > I think you are better off doing the way I have > done > > use the 888.94 as well as the 1000. > > That way you are going to make lesser mistakes. > > CP incorrect. the simple way tot hink about this problem is to say, reinvestment income only depends on your coupon payments. it has nothing to do with the price of the bond when you bought it or when you sell it. so all youneecd to do is compute the FV of the annuity of coupons and then subtract the coupons from it to get your reinvestment income. and as i mentioned earlier, my method is straightforward, i simply keyed interest wrong in my calculator.

I was thinking like this, very straightforward, but I don’t know how to use calculator to do it: Annuity: make payment 22.5 every half year, at the yield of 6.5%, after 13 payments, what’s the future value? This future value minus 22.5 * 13 is the reinvestment income Why 13? because the 14th payment is not going to produce any income, that’s the maturity. Where am I wrong? How should I use calculator to do it this way?

Portfolio Wrote: ------------------------------------------------------- > I was thinking like this, very straightforward, > but I don’t know how to use calculator to do it: > > Annuity: make payment 22.5 every half year, at > the yield of 6.5%, after 13 payments, what’s the > future value? > > This future value minus 22.5 * 13 is the > reinvestment income > > Why 13? because the 14th payment is not going to > produce any income, that’s the maturity. > > Where am I wrong? How should I use calculator to > do it this way? the calculator knows the 14th payment wont produce any reinvestment income. but you should put in 14 as n if you put in 13 as your n, then you’ll miss out 6mth’s interest for the each of your other payments (13 payments). and hence get a wrong answer.

even I put 14, I couldn’t get the right answer, how do you do it on your calculator