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
Assumptions
- Coupons AND repaid principal are reinvested immediately upon receipt
- Compounded at the bond's payment frequency
- Default reinvestment rate equals current YTM
- Return is FV of the reinvested cash minus the cash received
- The rate is a user assumption, not an implied market forward
Related Terms
Horizon Analysis
Projects bond returns for a holding period shorter than maturity.
Coupon
The bond's stated annual interest rate, applied to face value to determine periodic payments.
Current Yield
Annual coupon income divided by the bond's clean price.
Running Yield
Annual coupon income divided by the bond's dirty price (clean price plus accrued interest).
Yield to Maturity (YTM)
The annualized return if you hold the bond to maturity, assuming all coupons are reinvested at the same rate.
Dirty Price
The total settlement price paid for a bond, including accrued interest.