if the investor sold the bond after 3 years, that means there is negative duration gap, so reinvestment effect dominates price effect. so the annualized annual return should be less than 4.5%.
then why the answer is option A
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Hi,
Macaulay Duration is that point where the reinvestment effect exactly cuts of the price effect. So it is the immunizing period. If the bondholder sells the bond at that exact time, then no matter whether the market rate increases or decreases, he will earn approximately YTM i.e. 4.5% in this case. Therefore the answer should be Option A.
Hope this helps!