Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years, and have a 7% annual coupon rate paid semiannually.
a. Calculate the:
(1) Current yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return) for an investor with a threeyear holding period and a reinvestment rate of 6% over the period. At the end of three years the 7% coupon bonds with two years remaining will sell to yield 7%.
b. Cite one major shortcoming for each of the following fi xed-income yield measures:
(1) Current yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return).