Bond Reinvestment Income Question

CFA Level I Fixed Income
#1

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?

Thanks!

#2

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.

1 Like
#3

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

#4

Tease!

What did you get?

#5

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

#6

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…

Thanks!

#7

My pleasure.

#8

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.

#9

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.

#10

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