A 30-year, 12% bond that pays interest annually is discounted priced to yield 14%. However, interest payments will be invested at 12%. The realized compound yield on this bond must be: A. between 12.0% and 14.0%. B. greater than 14.0%. C. 12.0%.
Since you are reinvesting the current income at 12%, you will have a return of at least 12%. And since the bond is priced to yield 14%, you will earn no more than 14%.
