You purchase a semiannual coupon rate bond under the followi

You purchase a semi-annual coupon rate bond under the following assumptions:

Coupon rate: 7.0%

Maturity of bond: 28 years

Current YTM: 6.25%

Your intention is to hold the bond for 12 years, during which time you expect to receive a reinvestment rate on all coupon payments of 6.10%. Finally, at the time of sale you assume that the open market YTM will be 5.95%. Based upon the above items, find the horizon yield (HY) for this bond position.

Solution

N = 56, PMT = 35, rate - 6.25%/2, FV = 1000

uae FV funciton in Excel

price of bond today = 1098.58

N = 24, PMT = 70, PV = 0, rate = 6.10%/2

use FV value in Excel

Future vakue of coupons = 1,212.50

N = 32, FV = 1000, rate = 5.95%/2, PMT = 35

use PV function in Excel

value of bond after 12 years = 1,107.41

HY = (1107.41+1212.50/1098.58)^1/12 - 1 = 6.43%