Explanation

This question tests understanding of bond horizon yield and the relationship between purchase price, sale price, and yield to maturity.

Key Information:

• Bond purchased at issuance for 98 (discount to par)
• 5-year bond held for 2 years
• Coupon payments reinvested at original YTM
• Realized horizon yield = Original YTM

Analysis:

1. Purchase at Discount: When a bond is purchased at a discount (98 < 100), the YTM is higher than the coupon rate because the investor receives both coupon payments and capital appreciation as the bond approaches maturity.

2. Horizon Yield Concept: The realized horizon yield depends on:

   • Coupon payments received
   • Reinvestment income from coupons
   • Capital gain/loss from sale price

3. Mathematical Relationship: For the realized horizon yield to equal the original YTM when the bond was purchased at a discount:

   • The investor must sell the bond at a price above par to compensate for the fact that they didn't hold the bond to maturity to realize the full capital appreciation.

4. Intuition: When you buy a bond at a discount, part of your total return comes from the bond's price rising to par at maturity. If you sell before maturity, you need to sell at a premium to par to capture enough capital gain to maintain the same yield.

Example Calculation (Illustrative): If a 5-year bond with 5% coupon is purchased at 98 (YTM ≈ 5.47%), and held for 2 years:

• If sold at par: horizon yield would be lower than original YTM
• If sold above par: horizon yield could equal original YTM

Therefore, the correct answer is C: above par.