CFA 5

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 yield.

(2)

Yield to maturity.

(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 fixed-income yield measures:

(1)	Current yield.
(2)	Yield to maturity.
(3)	Horizon yield (also called realized compound return).

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