No. of Recommendations: 1
"When a bond’s yield to maturity and yield to call are calculated, the assumption is that the coupon is reinvested. How can the coupon be reinvested? Suppose I have $10,000 face value of Leucadia corp senior notes with a coupon of 5.5%, that mature in 2023, purchased at 92.37% of face value. The YTM and YTC are about 6.17%, but that assumes that the coupon is reinvested. I don’t understand how an interest payment can be reinvested? What am I not getting?"

Well, I guess the assumption of any IRR equation is that the reinvestment rate is constant, and that is of course not exact, but I guess the question is what is the alternative?

I guess you could assume:
1) 0%
2) risk free rate
3) @ reinvestment rate (YTM)

Of those choices, I think assume reinvestment at the rate of return you are investing in makes the most sense to me. It's an approximation, but it's not valid only if LUK bonds rise faster than the YTM which is probably a good thing for you(or they default)... so the assumption seems reasonable as an approximation. If you are buying heavily discount bonds or bonds with high chance of default, it is perhaps not a great approximation, but I would still say "what's the alternative?"

My 2 cents.
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