CFA Level 1: Bond Investment Analysis

Expected Realized Yield Calculation

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Question

An investor buys a 15-year, 10 percent annual pay coupon bond for $1,000. He plans to hold the bond for 5 years while reinvesting the coupons at 12 percent. At the end of the 5-year period he feels he can sell the bond to yield 9 percent. What is the expected realized (horizon) yield?

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A. B. C. D.

C

The key to this problem is to find all future cash flows. N = 5, I/Y = 12, PMT = 100, PV = 0CPT FV = 635.28 = VALUE OF COUPONSN = 10, I/Y = 9, PMT = 100,

FV= 1000CPT PV = 1,064.18 = VALUE OF BOND 5 YEARS OUT

Realized Return =

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