To calculate the RCY an investor would earn from a 12 percent reinvestment rate, add the total return from coupons shown in Table 17‐1, $7,738, to the maturity value of the bond, $1,000, to obtain the total dollar return of $8,738.⁹ Then divide by the purchase price and raise to the appropriate power (take the 40th root). Therefore,

To place this on a bond equivalent basis, multiply by two. The annual RCY is 5.57 percent × 2 = 11.14 percent.

Almost 75 percent of the total return comes from interest on interest ($5,738/$7,738).

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=[$8,738/1,000]1/40 -1.0 = 1.0557-1.0 = 0.0557, or 5.57% on a semiannual basis