LMN Co's bonds, issued 1 year ago, currently sell for $1,126. They have a 7.25% annual
coupon rate and a 21-year maturity, a $1,000 par value, and are callable in 7 years at
$1,060.00. Assume that no costs other than the call premium would be incurred to call and
refund the bonds, and also assume that the yield curve is horizontal, with rates expected to
remain at current levels in the future. Under these conditions, what rate of return should an
investor expect to earn if he or she purchases these bonds, 1 year after the issue?
5.6036%
6.2842%
4.7846%
5.5897%
6.1390%