My query is simple. When we calculate the PV of a bond we are basically discounting all the coupon payments and final pricipal payment with the Yield to Maturity.How does this take care of reinvestment income earned from coupon payments since we are not taking care of this anywhere. As given by CFA curriculum Yield to Maturity takes care of reinvestmet income also. It is assumed that the coupon payments must be reinvested at YTM but in calculations we never make any adjustments for this
I think the wording is a bit tricky. And maybe you are confusing two things: YTM and Realized Yield. YTM is the IRR given the cashflows. If you want to really earn that much (Realized Yield), you will have to satisfy some additional criteria, including ability to invest the coupons @YTM rates for the remaining time to maturity. So, reinvestment income does not automatically figure when you hear the YTM. “in calculations we never make any adjustments for this” -> Are you sure. I think there is some place in the books where we calculate the reinvestment income to illustrate how significant the amount is. Let us say YTM = 8, I/Y = 8, Periods = 2 for simplicity -100, +8, +108 (annual coupon) -100, 0, +116.64 (FV @8) 116.64 - 116 = 0.64 is the reinvestment income.