Horizon Analysis

Horizon analysis uses scenario analysis to estimate the expected total return, or horizon return, of a bond or portfolio over some investment horizon.

The horizon analysis framework allows portfolio managers to project the performance of bonds on the basis of the planned investment horizon and expectations concerning levels of risk, interest rates, reinvestment rates and future market yields.

By breaking down expected returns into scenarios, it is possible to evaluate which bonds would perform the best over the planned investment horizon – something that would not be possible using the yield to maturity. This scenario analysis enables the portfolio manager can see how sensitive a bond’s performance will be to each scenario, and whether it would be likely to meet their goals over the investment horizon.