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 the:

(1) Current yie ld.

(2) Yield to ma turity.

(3) Horizon yield (also called realized compound return) for an investor with a three-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 one major shortcoming for each of the following fi xed-income yield measures:

(1) Current yie ld.

(2) Yield to ma turity.

(3) Horizon yie ld (a lso c alled re alized c ompound re turn).

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