A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity (YTM) of 12%. If the interest payments are reinvested at 10%, the realized compounded yield on this bond is: A) 10.9%. B) 10.00%. C) 12.0% Answer : A Can anyone please explain?
On your BAII, plug these numbers in: 1st Step: N=20 PMT = -100 PV=0 I/Y = 10 CPT FV (FV=5,727) 2nd Step: FV= 5,727 + 1000 (par value) = 6,727 PV= -850 PMT = 0 N = 20 CPT I/Y (I/Y =10.9%) This is basically an MIRR questions. Check out core-models dot com, they have interactive models that can help you understand the logic behind this and many other concepts you will be tested in the CFA exam.
this may or may not be correct, but since the YTM is 12% and coupons are reinvested at 10% it would seem the realized compounded yld would have to be above 10, below 12…so that leaves one option. good to know the calc behind it as well
Yes ^ this what I answered as well from instinct. You know its not 10, because YTM is 12, and you know 12 is being “dragged down” because coupon payments are being reinvested at a lower rate, so it has to be inbetween. I hope there are more questions like these, process of elimination questions are easier.