Question

[darshang3]

A bond portfolio manager invests $20 million in a bond issued at par that matures in 30 years, and which promises to pay an annual interest rate of 9%. The interest is paid once per year and the payments are reinvested at an annual interest rate of 8%. The first payment is one year from today . What is the annual yield on this investment.?



is this question belongs to level 1.
and if yes how to calulate the yield?

thanks.

 

[David Harper CFA FRM]

Darshang - IMO, it's not a helpful question for an FRM candidate b/c it will never appear b/c it doesn't used language from assignments (e.g., is annual interest an annual coupon? is annual yield current yield or just annualized yield)...too imprecise and confusing ... probably copied from another exam/cirriculum/ect, the FRM bond questions are fairly consistent with their use of terms

there is a relevant idea in there: that the realized yield will not equal the original YTM unless coupons are reinvested at the YTM.

...David