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).