Reinvestment income

The source of dollar return called reinvestment income represents the interest earned from reinvesting the bond s interim cash flows (interest and/or principal payments) until the bond is removed from the investor s portfolio. With the exception of zero-coupon bonds, fixed income securities deliver coupon payments that can be reinvested. Moreover, amortizing securities (e.g., mortgage-backed and asset-backed securities) make periodic principal repayments which can also be invested. 

Thus the coupon payments and reinvestment income together are 159,194.49. The reinvestment income alone is 9,193.26, which is found by subtracting the total coupon payments ( 159,193,26 - 150,000). This number matches the reinvestment income (labeled as Interest 2.975% ) presented in the yield analysis screen in Exhibit 3.9. 

The following illnstration demonstrates this. In what follows, the analysis will be cast in terms of euros. Be sure to keep in mind the distinction between total future euros which are equal to all euros that the bond investor expects to receive (including the recovery of the principal) and the total euro return which is equal to the euros the investor expects to realize from the three sonrces of return, namely, coupon payments, capital gain/loss, and reinvestment income. 

Let us partition the total dollar return for this bond into its three components coupon payments, capital gain/loss, and reinvestment income. The coupon payments contribute 70 of the total euro return. The capital gain/loss component is zero because the bond is purchased at par and held to maturity. Lastly, the remainder of the total euro return ( 26.72) must be due to reinvestment income. 

To verify this, this par bond s total euro return of 96.72 is driven by two sources of euro return coupon payments and reinvestment income. Recall from the beginning of the chapter, the reinvestment income can be determined using the future value of an ordinary annuity formula. Accordingly, the future value of 10 annual payments of 7 to be received plus the interest earned by investing the payments at 7% compounded annually is found as follows ... 

There are two characteristics of a bond that affect the degree of reinvestment risk. First, for a given yield to maturity and a given nonzero coupon rate, the longer the maturity the more the bond s total return is dependent on reinvestment income to realize the yield to maturity at the time of purchase. The implication is that the yield to maturity measure for long-term coupon bonds tells us little about the potential return an investor may real-... 

And, of course, the most attractive feature of investing in bond funds is "daily liquidity"— bond funds have no set maturity date—the investor typically has the option to sell on any business day at the next available net asset value (usually the end of the day). Plus, many bond funds offer a check-writing option on the balance in addition to allowing the investor to automatically reinvest income dividends and to make additional investments at any time. 

Fair trade a basis for adequate producers incomes, farm reinvestment and quality and safety focused production... 

It also shows the net income for year 1. It is important to understand that the terms net income and earnings are used interchangeably in financial reports. You will note that the net income for year 1 is 300,000. The balance sheet (Table 15-2) shows retained earnings of 200,000. This is the portion of the net income that the owners have reinvested in the business. Where did the rest ( 100,000) of the net income go It was redistributed among owners as dividends (as depicted in Table 15-4). The connection between the net income value from the income statement and retained earnings from the balance sheet is an example of how these two reports are linked. In this particular example, the details of this linkage can be examined by the statement of retained earnings (Table 15-4). 

For the various social groups (the government, labourers, tax payers, etc.) it has to be determined to what extent they consume the additional income out of a project and how much will be saved for reinvestment. Further a premium has to be allocated for the import savings, the increase in the use of unskilled labour and a penalty for the use of scarce skilled labour. Based on this information it can be calculated, whether the project is profitable for the various social groups and the country as a whole. 

In engineering economic evaluation, rate of return on investment is the percentage ratio of average yearly profit (net cash flow) over the productive life of the project, divided by the total initial investment. This is calculated after income taxes have been deducted from the gross or pre-tax income. The remainder or net income may be used either for paying dividends, reinvestment, or can be spent for other means. ROI is defined by... 

To obtain the price of an inflation-linked bond, it is necessary to determine the value of coupon payments and principal repayment. Inflation-linked bonds can be structured with a different cash flow indexation. As noted above, duration, tax treatment and reinvestment risk, are the main factors that affect the instrument design. For instance, index-aimuity bmids that give to the investor a fixed annuity payment and a variable element to compensate the inflation have the shortest duration and the highest reinvestment risk of aU inflation-linked bonds. Conversely, inflation-linked zero-coupon bonds have the highest duration of all inflation-linked bonds and do not have reinvestment risk. In addition, also the tax treatment affects the cash flow structure. In some bond markets, the inflation adjustment on the principal is treated as current income for tax purpose, while in other markets it is not. 

Income earned from reinvestment of the bond s interim cash flows (i.e., coupon payments and principal repayments). 

Ideally, an instrument s yield indicates what return an investor can achieve by holding it. Such an ideal measure would be a function of the value of the initial investment, the holding period, and the value of the matured investment. It would also take into account any reinvestment of the income received during the holding period—that is, the effect of compounding. A yield measure having these properties may be defined as follows for a simple instrument such as a Treasury bill. 

If you want steady income, stick with short to medium. Investors looking for income should invest in a laddered portfolio of short- and intermediate-term bonds. By reinvesting the prin-... 

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