YTM reinvested

Base case: $94.17 buys an 8-year CD @ 8%

CD @

94.17

rate

8%

Total future dollars

176.38

Dollar return

82.21

Compare to bond purchase 

Bond @

703.1

Face

1000

coupon

5.0%

Coupons reinvested @

5%

Periods

Reinvested

Coupon

Period (semiannual)

1

15

25

11.21

2

14

25

10.32

3

13

25

9.46

4

12

25

8.62

5

11

25

7.80

6

10

25

7.00

7

9

25

6.22

8

8

25

5.46

9

7

25

4.72

10

6

25

3.99

11

5

25

3.29

12

4

25

2.60

13

3

25

1.92

14

2

25

1.27

15

1

25

0.62

16

0

25

0.00

Total Coupon

400

84.51

Case: if coupons are not reinvested: outcome = dollar return shortfall

Coupon interest

400

Capital gain

296.9

Dollar return

696.9

Case: coupons reinvested @ 5%: outcome = dollar return equivalence

Coupon interest

400

Capital gain

296.9

Reinvestment

84.51

Dollar return

781.41