Bond Reinvestment Income Question

Can anyone explain to me how to solve this problem?

Jane Walker has set a 7% yield as the goal for the bond portion of her portfolio. To achieve this goal, she has purchased a 7%, 15-year corporate bond at a discount price of 93.50. What amount of reinvestment income will she need to earn over this 15-year period to achieve a compound return of 7% on a semiannual basis?


First, you need to determine the terminal value of her investment. (How do you do that?)

From that, you subtract the value of her coupon payments and her principle payment; what’s left is the amount of reinvestment return she’ll need. It should be about $574.35.

I spent days on this question before finally getting the answer.


What did you get?

The right answer., it’s actually 57.43521139 :slight_smile:

You guys are both correct, depending on what you set the face value of the bond too ($1000 vs. $100). Just never made sense to me why you would need to find the terminal value of the bond as 935*(1+semi-annual coupon)# of times compounded in the period


My pleasure.

I’m sorry but I still don’t understand how to calculate it.

I am trying to find FV of the investment,but it is 100,isn’t it? So the YTM is7.73% by semiannual coupon. So I can calculate the FV of all the coupon payments with this YTM, and it is 191.

I think there is something wrong with it but I can’t explain what is that.

The FV of the investment is the $100 face plus the coupons rolled up with interest. Roll up the 93.5 with 15 years of interest at 7% semi-annually, then equate it to 100 + sum of coupons + reinvestment income.

Thank you very much! I have got the right answer!