Tom purchased a bond today with a 20-year maturity and a yield to maturity (YTM) of 6%.

The coupon rate is 8% and coupons are paid annually. The par value is $1,000. Tom is going to hold this bond for 3 years and sell the bond at the end of year 3. The bond's yield to maturity will change to 8% at the time when Tom sells the bond. Assume coupons can be reinvested in short term securities over the next three years at an annual rate of 10%. Which of the following regarding Toms annual holding period return (HPR) of this bond investment is correct?

I. Toms annual HPR will be higher than 6% due to a capital gain from selling the bond at year 3

II. Toms annual HPR will be lower than 6% due to a capital loss from selling the bond at year 3

III. Toms annual HPR will be higher than 6% due to the higher reinvestment rate of 10%

IV. Toms annual HPR will be lower than 6% because gains from the 10% reinvestment rate will be largely offset by the capital loss from selling the bond at year 3

A. I only

B. II only

C. III only

D. I and III only

E. II and IV only