Assume that you purchase a 3-year $1,000 par value bond,with a 8% coupon,and a yield of 10%.After you purchase the bond,one-year interest rates are as follow,year 1 = 10%,year 2 = 8%,year 3 = 6% (these are the reinvestment rates).Calculate the realized horizon yield if you hold the bond to maturity.Interest is paid annually.
A) 8.37%
B) 7.28%
C) 9.76%
D) 10.67%
E) 14.0%

Question

Quizplus · Accepted Answer

The purchase price is = $950.26 =
 $$80 \left( \frac { 1 - \frac { 1 } { 1.1 ^ { 3 } } } { .1 } \right) + \frac { 1000 } { 1.1 ^ { 3 } }$$ 
 The terminal value of cash flowr
$$\begin{array} { l } 
= \$ 1256.38 \
= 80 ( 1.08 ) ( 1.06 ) + 80 ( 1.06 ) + 80 + 1000
\end{array}$$ 
The realized horizon yield = 9.76% =
 $\left( \frac { 1256.38 } { 956.26 } \right) ^ { 1 / 3 } - 1$

Assume That You Purchase a 3-Year $1,000 Par Value Bond,with