10M of bonds at par value. Maturity is 20 years. Coupon rate is 7%. Coupons can be reinvested at 8%. Investor is looking at various interest rate change scenarios. Once where the interest rate of bonds is immediately changed to 8%. Calculate in Bond Equivalent Yield terms, the return over the next year if interest rates change as expected. I havent done one of these in a while. I see Schweser tests the concept multiple times, but it only shows up as a small blurb in CFAI text with no EOC questions or Blue Boxes specifically covering it. it says LOS 28.e. and I happen to not have the CFAI book at home right now. can someone confirm/deny that this is an objective of the LOS according to CFAI text?

350,000(1.035) + 350,000 from coupon. 100 FV, 40n, 3.5 PMT, 4 I/Y, CPT PV = 90.103 .90103(10,000,000) + 362,500 + 350,000 FV, -10,000,000 PV, 2N, CPT I/Y (1 + I/Y(.01))^2 = Return = -2.772%

I can tell you i’ve seen it show up twice now in CFAI tests. Usually its pretty simplistic though. They give you the expected bond value in a year, for example.

Paraguay Wrote: ------------------------------------------------------- > 350,000(1.035) + 350,000 from coupon. > > 100 FV, 40n, 3.5 PMT, 4 I/Y, CPT PV = 90.103 > > .90103(10,000,000) + 362,500 + 350,000 FV, > -10,000,000 PV, 2N, CPT I/Y > > (1 + I/Y(.01))^2 = Return = -2.772% I think that is EAY, BEY would be multiply by 2

EAY would be your total return. So based on the post total return analysis would take EAY.

close enough imo para… OK will review PV bond in 1 year: N= 38 pmt= 3.5 i/y= 4 FV= 100 CPT PV= -90.32 Value of coupons at end of year one: n=2 pmt= 3.5 i/y=4 pv=0 FV= -7.14 The semi annual return is the rate of return between today adn the accumulated value one year from now. n=2 pmt=0 PV= -100 FV= (90.32 + 7.14)= 97.46 CPT I/y= -1.28 BEY = -1.28 x 2 = -2.56

But it explicitly asks for BEY. Only reason i’m making a point is because i have seen it asked both ways in Schweser… and since i calculate manually (no calculator, i find it more confusing) … it trips me up sometimes because the holding period return is already in EAY, so i have to do the opposite process and un-compound to get back to BEY.

Oh yeah. I didn’t read the problem. Only the first part. Doing a test on VAR. Which is by far my worst section.

Generally it will give on the CFA test in the past. Value of bond at T1 Reinvestment Interest Rate Rest is fairly simple.

^^^ thats how i’ve seen it. Literally the only thing you have to do is calculate the coupon FV @ the reinvest rate, add it to T1 bond, and divide by initial. Done. Var is easy mode, why you having issues? Only part that is confusing is time adjusting SD

Paraguay Wrote: ------------------------------------------------------- > 350,000(1.035) + 350,000 from coupon. > > 100 FV, 40n, 3.5 PMT, 4 I/Y, CPT PV = 90.103 > > .90103(10,000,000) + 362,500 + 350,000 FV, > -10,000,000 PV, 2N, CPT I/Y > > (1 + I/Y(.01))^2 = Return = -2.772% Paraguay: Should not it be $350,000 (1.04) since the market rate is changed as expected?

markCFAIL Wrote: ------------------------------------------------------- > ^^^ thats how i’ve seen it. Literally the only > thing you have to do is calculate the coupon FV @ > the reinvest rate, add it to T1 bond, and divide > by initial. Done. > > > Var is easy mode, why you having issues? Only > part that is confusing is time adjusting SD It seems like it should be an easy concept, however questions keep coming up that I swear aren’t anywhere in the curriculum. I did well on the one in CFA Sample and Schweser Mock but some of the questions just seem to come out of nowhere in Risk Management.

This question was weird, the FV of the coupon and PV of the bond were less than the price. What’s the final answer?

PV bond in 1 year: N= 38 pmt= 3.5 i/y= 4 FV= 100 CPT PV= -90.32 Value of coupons at end of year one: n=2 pmt= 3.5 i/y=4 pv=0 FV= -7.14 The semi annual return is the rate of return between today adn the accumulated value one year from now. n=2 pmt=0 PV= -100 FV= (90.32 + 7.14)= 97.46 CPT I/y= -1.28 BEY = -1.28 x 2 = -2.56