Bonds of Zello Corporation with a par value of $1,000 sell

Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in 5 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 3 years the 7% coupon bonds with 2 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).


Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...

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