Quiz Total Bond return return

transferpricing

Calculate the one year expected return:

Beginning price $103, 5% semiannual coupon, expected price at the end of one year: $102.5.
Annual reinvestment rate: 2%.

Windjam

I got 4.393% but that's just based on CF analysis

25.25 + 25 - 5 = 45.25 / 1030 = 4.393%

do we have to adjust for BEY? I know this is how they are generally quoted, but when calculating total return wouldn't the actual total return be more accurate?

NakedPuts00

That is always the assumption. A lot of times I think this forum attempts to trick people, but bonds always have the annual coupon.

ohai

FinNinja Wrote:
-------------------------------------------------------
> I got 4.393% but that's just based on CF analysis
>
> 25.25 + 25 - 5 = 45.25 / 1030 = 4.393%
>
> do we have to adjust for BEY? I know this is how
> they are generally quoted, but when calculating
> total return wouldn't the actual total return be
> more accurate?

A lot of the Schweser questions used to ask for BEY.

This used to be a very large portion of the fixed income section so a lot of the Schweser material leaves this as legacy.

It is literally a single blue box now.

liangfeng

Paraguay Wrote:
-------------------------------------------------------
> FinNinja Wrote:
> --------------------------------------------------
> -----
> > I got 4.393% but that's just based on CF
> analysis
> >
> > 25.25 + 25 - 5 = 45.25 / 1030 = 4.393%
> >
> > do we have to adjust for BEY? I know this is
> how
> > they are generally quoted, but when calculating
> > total return wouldn't the actual total return
> be
> > more accurate?
>
> A lot of the Schweser questions used to ask for
> BEY.
>
> This used to be a very large portion of the fixed
> income section so a lot of the Schweser material
> leaves this as legacy.
>
> It is literally a single blue box now.


Paraguay is actually correct! It was a CFAI question.
However, what I am struggling with is why is the BEY the total return? I thought the EAR is the total return which would be 4.39 ?
In SS9, p.49 Q8, Schweser asks for the "total effective return" which in their guideline answer is the effective annual return (EAR).

Any explanations gentlemen?

Unforseen

Mr.Anderson Wrote:
-------------------------------------------------------
> Paraguay Wrote:
> --------------------------------------------------
> -----
> > FinNinja Wrote:
> >
> --------------------------------------------------
>
> > -----
> > > I got 4.393% but that's just based on CF
> > analysis
> > >
> > > 25.25 + 25 - 5 = 45.25 / 1030 = 4.393%
> > >
> > > do we have to adjust for BEY? I know this is
> > how
> > > they are generally quoted, but when
> calculating
> > > total return wouldn't the actual total return
> > be
> > > more accurate?
> >
> > A lot of the Schweser questions used to ask for
> > BEY.
> >
> > This used to be a very large portion of the
> fixed
> > income section so a lot of the Schweser
> material
> > leaves this as legacy.
> >
> > It is literally a single blue box now.
>
>
> Paraguay is actually correct! It was a CFAI
> question.
> However, what I am struggling with is why is the
> BEY the total return? I thought the EAR is the
> total return which would be 4.39 ?
> In SS9, p.49 Q8, Schweser asks for the "total
> effective return" which in their guideline answer
> is the effective annual return (EAR).
>
> Any explanations gentlemen?

Old convention from before we all had bloomberg terminals and tradeweb.

BEY used to be the only way to quote a bond that people could understand.

Analyze_This

I am European. We almost exclusively have annual coupon payments.......

so but why uses Schweser in ther EOC question the EAR for the total return? Or does it depend on their wording of total "effective" return?



Edited 1 time(s). Last edit at Tuesday, May 31, 2011 at 10:50AM by Mr.Anderson.

Valores

Mr.Anderson Wrote:
-------------------------------------------------------
> I am European. We almost exclusively have annual
> coupon payments.......
>
> so but why uses Schweser in ther EOC question the
> EAR for the total return? Or does it depend on
> their wording of total "effective" return?

I guess it depends on their interpretation. Again, this used to be a very large part of the curriculum circa 2006-2007, it is one blue box now. Schweser LIII is very poor.

wake2000

4.345% BEY

aidebaobao

Paraguay - could you indicate the blue box you are refering to? I am looking at SS9 example 5 on page 27 of CFAI text, but I don't see a mention that total return should be in BEY. I know this is probably a small chance question, but it seems like easy point if I can get a clear answer on proper format.

If this used to be a big part of the test before there is a chance it could show up now. It would be one of those curve balls from CFAI that those in the know could score points over those in the dark.