# How to Calculate Horizon Yield / Realized Compound Yield

Updated: Aug 5, 2021

The horizon yield is used to calculate the return on a fixed income investment given that the coupons are reinvested at a rate other than yield to maturity.

In order to calculate the horizon yield:

1. Create a timeline of cash flows

2. Find the future value of each cash flow assuming it is re-invested for the life of the bond.

3. Calculate the return given the future value after re-investment.

Example: A bond pays annual coupons of \$100 dollars and matures in three years. If the prevailing reinvestment rate in the following years is:

Year 1 15% | Year 2 12% | Year 3 22% | Year 4 17% |

What is the horizon yield?

1) Create a timeline of cash flows

2) Find the future value of each cash flow assuming it is re-invested for the life of the bond.

Notice that because we don't receive the first payment until the end of year 1 we reinvest our first coupon at the rate prevailing rate in years 2 and 3. As an example, the interest rate from time 0 to 1 is the year 1 interest rate, the interest rate of 1 to 2 is the year 2 interest rate, and 2 to 3 is year 3.

3) Calculate the return given the future value after re-investment.

This can be done by hand or by using a financial calculator. By hand, we will simply divide the future value sum by the cost of purchasing the bond and then raise that to the power of 1/n which is 3 in this case.

By hand:

(1358.64/1000)^(1/3)-1 = 10.76%

Using the financial calculator:

N=3

IY=?

PV = -1000

PMT = 0

FV =1358.64

Calulate IY = 10.76%