Horizon Yield vs. BEY and EAR??

CFA Level III Fixed Income
#1

Hi all,

In the example on page.19 of book 3 Schweser, namely “Scenario Analysis”, i find it really hard to grasp the whole concept here

  1. Originally the 9% yield is calculated given all the other parameters and the price of $105.11. Then, we are given the table of different horizon yields - how come the horizon price changes accordly? (e.g. for Horizon yield = 11, the horizon price is calculated using the 11% as I/Y now to get 95.69, so we are actually calculating the price basing on a yield assumption now?? why?

  2. The other part that confuses me is how horizon yield is inversely related to BEY and EAR.

someone please shred some lights!!

Jeffrey

#2

1 is calculating the effect of different interest rate assumptions when the “liability” becomes due (the horizon).

  1. bey and ear are a compounding concept. as N increases BEY would come down and vice versa.
#3
  1. The horizon prices are calculated at Time 1. At which time there are 6yrs to maturity, 10% coupons, FV $100 and Yields from 5% - 11% (these are the scenarios being tested)

2 At Time 0, the bond was priced to yield 9% ($105.11). This is the value at Time 0.

At Time 1, if Horizon Yield moves up to 11% - bond value reduces, and if horizon yield goes down to 5% - Bond value increases. This is due to the inverse relationship between rates an bond prices. (see calculations)

BEY at at Time 1 will be the yield from the value at Time 0 to Time 1. BEY and EAR increase as value at time 1 increases.