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 each of the following yields:

i. Current yield.

ii. Yield to maturity to the nearest whole percent (i.e., 3%, 4%, 5%, etc.).

iii. Horizon yield (also called total compound return) for an investor with a 3-year 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 a major shortcoming for each of the following fixed-income yield measures:

i. Current yield.

ii. Yield to maturity.

iii. Horizon yield (also called total compound return). P-963