B is the answer. One would anticipate a realized compound yield rate less than the coupon rate since the reinvestment rate is less than the coupon rate. This question requires a two-step calculation. In the first step, we calculate the future value of the interest payments of $120 from the bond for 15 years and they can be reinvested at 7%. In the second step, the result of this first calculation must be added to the par value of the bond because par value will be paid at maturity. The par value of a bond is $1,000 so the FV is $4,015.48. Then we enter par for the purchase price as well so the PV is $1,000.
PMT = 120 (annual compounding)
Number of Periods = 15
Interest Rate = 7%
FV $3,015.48
FV = $4,015.48
Number of Periods = 15
PV = $1,000
Interest Rate calculated as 9.71%
