Lesson 2 of 5 · All lessons in this module
- The three sources of return on a fixed-rate bondVideo lesson
- Horizon yield: the realized return when rates moveVideo lesson
- Reinvestment risk, price risk and the duration gapVideo lesson
- Calculating Macaulay duration on a coupon dateVideo lesson
- Macaulay duration between coupon dates and the closed-form formula
Lesson 2 of 5 · 14 min
Horizon yield: the realized return when rates move
The horizon yield is the compound annual return from what you paid to what you hold at the horizon: reinvested coupons plus the sale price or redemption value.
In short
- Horizon yield = the investor's IRR over the holding period: .
- Ending value = future value of reinvested coupons + sale price (or redemption at par if held to maturity).
- If rates rise right after purchase: reinvestment income rises, the sale price falls.
- If rates fall: reinvestment income falls, the sale price rises.
- A buy-and-hold investor is hit only through reinvestment; a short-horizon investor is hit mostly through the sale price.
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