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

Question

Quizplus · Accepted Answer

The realized horizon yield is calculated by considering the reinvestment of coupon payments at the given rates and the final redemption of the bond at par. The reinvested coupons and the final par value sum up to a future value, which is then used to calculate the realized yield over the holding period.

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