Assume that you purchase a 5-year $1,000 par value bond,with a 6% coupon,and a yield of 7%.Immediately after you purchase the bond,yields rise to 8% and remain at that level to maturity.Calculate the realized horizon yield if you hold the bond to maturity.Interest is paid annually.
A) 6.0%
B) 7.11%
C) 8.0%
D) 15.25%
E) 8.18%

Question

Quizplus · Accepted Answer

The purchase price is = $959 =
 $60 \left( \frac { 1 - \frac { 1 } { 1.07 ^ { 5 } } } { .07 } \right) + \frac { 1000 } { 1.07 ^ { 5 } }$ 
The terminal value of cash flows at year 5 = $1352 =
 $60 \left( \frac { 1.08 ^ { 5 } - 1 } { .08 } \right) + 1000$ 
The realized horizon yield = 7.11% =
 $\left( \frac { 1352 } { 959 } \right) ^ { 1 / 5 } - 1$

Assume That You Purchase a 5-Year $1,000 Par Value Bond,with