Reinvestment Return
Income from reinvested coupons at the assumed rate.
Reinvestment return is the additional income earned by reinvesting coupon payments at a given rate until the horizon date. It equals the future value of reinvested coupons minus their face value.
Formula
Where
=Reinvestment rate
=Time remaining to horizon
=Bond price at purchase
Variables
| R_{reinvest} | Reinvestment return (decimal) |
| CF_i | Coupon payment at time t_i |
| r | Annual reinvestment rate (decimal) |
| T | Time to horizon (years) |
| t_i | Time of coupon payment (years) |
| P_0 | Initial dirty price |
Assumptions
- Coupons reinvested immediately upon receipt
- Annual compounding at reinvestment rate
- Default reinvestment rate equals current YTM
- Return is FV of reinvested coupons minus face value