Has anyone come across an income yield question (in calculating holding period return for a bond) that includes a reinvestment assumption for the semi-annual coupon?
I thought I had come across a question at one point earlier in my studies, but haven’t been able to find it.
Anyone know where I can locate a question that includes a coupon reinvestment, or is the general assumption that any questions related to this that might come up on the exam will assume no reinvestment?
Haven’t seen one involving the reinvestment of the coupon earnings for the rest of the year. The closest thing you would find is calculating expected returns of the bond portfolio in readings 21 and 24 (I think).
Annual coupon per 100/average bond price = income yield.
(S1-S0)/S0 = roll return
… etc.
That being said they do talk about Macaulay duration as being the balance point between pricing risk and reinvestment risk. I.e. if the curve shifts initially and parallel and you’re holding to maturity, the price risk gets offset by reinvestment returns on invested coupons (if curve shifts up) and the reinvestment risk gets offset by the increased price (if curve shifts down)