CFAI book 4 P149 Reading 21 Fixed Income Example 6

[traci_tracy]

In Example 6, Exhibit 8, there is a column ‘interest on interest’. Could someone help me on how to get these numbers? Thank you!

 

[ink]

the exhibit assumes that when you get the coupon, you reinvest it at one of the new yields.
The number of years to maturity is 5, so the number of periods is 10. In each period, you get 361608.7.
Assume that you reinvest this money at a new yield of 8% (semianual 4%) to calculate the FV
N=10, PMT=361608.7; I/Y=4, PV=0;
FV=4341512.9
This future value includes the copon value and the reinvestment value (interest on interest). To find interest on interest only: 4341512.9-3616087=$725426

 

[traci_tracy]

Thank you so much!!