Answer: 6.13%

**Explanation:** This is a bond horizon yield calculation problem. Let's break it down: **Given:** - 30-year bond, 5% annual coupon - Purchase price: 86.24 (86.24% of par, so $862.40 per $1,000 face value) - Holding period: 11 years - Immediately after purchase, interest rates increase by 1% - Coupons are reinvested at the new yield - Rates remain at the new level until maturity **Step 1: Calculate the purchase yield** At purchase price of 86.24, the yield to maturity (YTM) can be calculated: - Bond price = 86.24 - Coupon = 5% - Maturity = 30 years Using financial calculator or approximation: N = 30, PV = -86.24, PMT = 5, FV = 100 Solve for I/Y ≈ 6.0% So the original yield was 6.0%. **Step 2: New yield after rate increase** Interest rates increase by 1%, so new yield = 6.0% + 1% = 7.0% **Step 3: Calculate bond price after 11 years** After 11 years, the bond will have 19 years remaining to maturity (30 - 11 = 19). At 7% yield, the price of a 19-year, 5% coupon bond: N = 19, I/Y = 7, PMT = 5, FV = 100 PV ≈ 79.67 **Step 4: Calculate reinvested coupon income** Coupons are $5 annually for 11 years, reinvested at 7%. This is a future value of an annuity: PMT = 5, N = 11, I/Y = 7% FV ≈ $78.94 **Step 5: Calculate total future value** Total future value after 11 years: 1. Sale price of bond: $79.67 2. Reinvested coupons: $78.94 Total FV = $79.67 + $78.94 = $158.61 **Step 6: Calculate horizon yield** Initial investment: $86.24 Horizon: 11 years Total FV: $158.61 Solve for annual return: PV = -86.24, FV = 158.61, N = 11 I/Y ≈ 6.13% **Verification:** The horizon yield of 6.13% is between the original yield (6.0%) and the new yield (7.0%), which makes sense because: - The investor suffers a capital loss when selling the bond at a lower price (due to higher rates) - But earns higher reinvestment income on coupons - The net effect is a realized yield slightly above the original purchase yield Therefore, the realized horizon yield is closest to **6.13%**.

Author: LeetQuiz .