Annual pay versus semi-annual pay:
Many non-US governments and corporate bonds that pay annual coupons.
Annual pay yield = (1 + BEY/2)2 - 1.
BEY = [(1 + Annual-pay yield)1/2 - 1] x 2.
Total Dollar Return = coupons + principal + reinvestment income, i.e. to calculate the FV of the reinvestment coupon + principal at maturity
Reinvestment income
Reinvestment income can make up a large portion of the return for a bond due to its compounding effect.
Factors That Affect Reinvestment Risk
There are two characteristics that affect reinvestment risk:
· The longer the maturity, the more the total dollar return depends on reinvestment income to realize the yield to maturity at the purchase time. Longer maturity = greater reinvestment risk.
· The higher the coupon rate, the more the total dollar return depends on the reinvestment of the coupon payments. Higher coupon rate = greater reinvestment risk
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment