Assume that you purchase a 10-year $1,000 par value bond,with a 12% coupon,and a yield of 9%.Immediately after you purchase the bond,yields fall to 8% and remain at that level to maturity.Calculate the realized horizon yield,if you hold the bond for 5 years and then sell.Interest is paid annually.
A) 16.25%
B) 12.15%
C) 7.75%
D) 10.05%
E) 9.34%

Question

Quizplus · Accepted Answer

The purchase price is = $1192.53 =
 $120 \left( \frac { 1 - \frac { 1 } { 1.09 ^ { 10 } } } { .09 } \right) + \frac { 1000 } { 1.09 ^ { 10 } }$ 
The selling price after 5 years is = $1159.71 =
 $20 \left( \frac { 1 - \frac { 1 } { 1.08 ^ { 5 } } } { .08 } \right) + \frac { 1000 } { 1.08 ^ { 5 } }$ 
The terminal value of cash flows at year 5 = $1863.70 =
 $120 \left( \frac { 1.08 ^ { 5 } - 1 } { .08 } \right) + 1159.71$ 
The realized horizon yield = 9.34% =
 $\left( \frac { 1863.70 } { 1192.53 } \right) ^ { 1 / 5 } - 1$

Assume That You Purchase a 10-Year $1,000 Par Value Bond,with