BOND MATH: The Theory Behind the Formulas

Horizon Yields and Holding-Period Rates of Return

Suppose that you buy the 10-year zero-coupon corporate bond at 60 but you have no intention of holding it all the way to maturity. Then 5.174% (s.a.) is only a reference yield—your own realized rate of return will depend on the price at which you sell the bond. We use the term “horizon yield” for the annual rate of return when the holding period differs from the time to maturity. This can be an ex-ante yield based on a projected sale price in the future or an ex-post rate of return calculated after the fact from the actual price at the time of sale. We can even extend the idea to a holding period beyond the maturity date. Then we would need to project (or observe) the price and yield at maturity ...