The biggest mistake ever made by a US Treasury bond buyer occurred in November 1981 when a would-be CPA invested $1 million in company money with the intention to fund a $25 million liability of the company falling due in mid-November 2006. He bought $1 million in par value of a just-issued US Treasury 14.00% due 11/15/2011 (but callable starting 11/15/2006) priced at 100% of par thinking that this investment actually locked-in its initial 14.00% yield-to-maturity for at least the 25-year period out to its initial 11/15/2006 call date. This bond buyer erred in his thinking because

1. A bond does not lock-in the initially quoted yield to its maturity date.

2. Actual returns on a coupon-paying bond depend on income from the reinvestment income on the intervening coupon payments until the bonds maturity date.

3. He assumed a constant reinvestment rate of 14% throughout all 25 years.

4. All of the above.